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niversity  of  C.l« 

IRVINE 


2 

HISTORY  AND  CRITICISM  OF  THE 
LABOR  THEORY  OF  VALUE 


STUDIES  IN  HISTORY,  ECONOMICS  AND  PUBLIC  LAW 

EDITED    BY    THE    FACULTY   OF   POLITICAL   SCIENCE   OF 
COLUMBIA  UNIVERSITY 

Volume  XIX]  [Number  2 


JEISTOKY  AKD  CRITICISM 

OF   THE 

LABOR  THEORY  OF  VALUE 

IN  ENGLISH  POLITICAL  ECONOMY 


BY 

ALBERT  C.  WHITAKEE,  Ph.D., 

Sometime  University  Fellow  in  Economics,  Columbia  University ; 
Instructor  in  Economics,  Leland  Stanford  Junior  University 


THE   COLUMBIA   UNIVERSITY  PRESS 

THE  MACMILLAN   COMPANY,  AGENTS 
LONDON  :  P.  S.  KING  &  So\ 

1904 


COPYRIGHT,  1904, 

BY 
ALBERT  C.  WHITAKER 


CONTENTS 


CHAPTER  I 

GENERAL   OUTLINES   OF  THE  HISTORY  OF  THE  LABOR  THEORY 

{  I.  Scope  of  the  present  history 9 

{  2.  Great  diversity  of  early  opinions  on  value 10 

§  3.  The  two  main  ideas,  the  "philosophical"  and  the  "empirical" 

accounts  of  value 12 

CHAPTER  II 

ADAM  SMITH'S  PHILOSOPHICAL  OR  PRIMITIVE  ACCOUNT  OF  VALUE 
8  I.  Interpretation  of  Smith's  doctrine  of  value  rendered  difficult  by 

a  plurality  of  explanations 16 

1  2.  Preliminary  observations   concerning   the   use   of  the   terms 

"labor"  and  "value" ••....      19 

2  3.  The  two  distinct  labor  standards  in  the  primitive  account — the 

"labor  cost"  and  the  "labor  command"  standards  ....  20 

I  4.  Smith's  conception  of  quantity  of  labor 22 

{  5.  The  labor  and  the  corn  measure  of  value  in  different  times  and 

places 24 

CHAPTER  III 

THE  EMPIRICAL  ACCOUNT   OF  ADAM   SMITH 

i  I.  Abandonment  of  the  labor-cost  standard  for  the  conditions  of 

real  society 29 

|  2.  The  labor-command  standard  retained  as  still  valid 30 

CHAPTER  IV 

CRITICISM    OF    THE    THEORIES    OF   ADAM    SMITH 

i  i.  Principal  argument  for  the  labor-command  standard  a  theory 

of  labor  as  undifferentiated  or  potential  commodity 3* 

8  2.  Complete  failure  of  this  theory  to  afford  an  ultimate  philosophy 

of  value 34 

{  3.  The  concept  of  labor  as   disutility   cost   suggests   later   valid 

theories,  but  fails  to  lead  to  a  satisfactory  result 36 

263]  5 


$  CONTENTS  [264 

FACE 

|  4.  The  arguments,  by  which  Smith  supports  the  labor-command 
standard,  prohibit  its  use  under  the  conditions  of  advanced 
society 39 

CHAPTER  V 

RICARDO  AND  THE  TRUE  CLASSICAL  LABOR  THEORY 

{    I.  General  estimate  of  Ricardo's  theory 41 

{  2.  At  foundation  an  attempt  to  reconcile  the  "philosophical" 

and  ' '  empirical ' '  accounts 42 

|  3.  Preliminary  conditions  of  the  theory  laid  down  by  Ricardo 

himself 44 

{  4.  How  determine  quantity  of  labor ;  unsatisfactory  treatment  of 

skilled  labor ;  labor  indirectly  applied 46 

{  5.  The  introduction  of  interest  on  capital  as  an  element  in  cost 

of  production  (i.  e.,  enterpreneur's  cost) 49 

t  6.  In  Ricardo's  conception,  interest  enters  into  Natural  Price  or 

Normal  Value,  though  he  does  not  make  this  clear 50 

5    7.  Essence  of  Ricardo's  explanation  of  the  complication  of  interest.    52 

{    8.  Peculiarly  roundabout  form  of  statement  of  the  same   ....      53 

\  9.  Ricardo's  explanation  of  the  complication  also  positively  mis- 
leading   55 

\  10.  Summary 56 

CHAPTER  VI 

MCCULLOCH,  JAMES   MILL  AND  TORRENS.      ANTICIPATION   OF  MARx's 
THIRD  VOLUME 

$  I.  The  interest  which  attaches  to  these  three  minor  writers  ...      61 

{  2.  Samples  of  McCulloch's  extravagant  dogmatism 62 

?  3.  McCulloch  anticipates  Marx's  solution  of  the  "organic  compo- 
sition of  capital"  complication 64 

I  4.  James  Mill's  complete  misapprehension  of   the  nature  of  the 

interest  difficulty 70 

{  5.  False  move  made  by  Torrens  in  defining  the  concept  of  entre- 
preneur's cost 74 

{  6.  Shallow  attempt  of  Torrens  to  avoid  the  interest  difficulty  by  a 

theory  of  "  accumulated  labour  " 76 

CHAPTER  VII 

THE  EMPIRICAL  THEORY  AS  DEVELOPED  BY  MALTHUS 

I  I.  Malthus  a  prolific  writer  on  value,  and  opponent  of  Ricardo   .      79 
I  2.  An  important  transfer  of  emphasis  from  the  "philosophical" 

to  the  ' '  empirical ' '  account 79 


365]  CONTENTS  7 

PACE 

I  3.  The  law  of  costs  made  subordinate  to  the  law  of  supply  and 

demand 80- 

5  4.  Detailed  criticism  of  Ricardo's  labor-cost  theory 83 

?  5.  Majority  of  these  points  of  criticism  provided  for  by  Ricardo 

himself 85 

{  6.  Difference  between  the  two  economists  partly  one  of  emphasis : 

ultimate  gain  of  Malthus'  theory 86 

{  7.  Note  on  the  question  of  the  invariable  measure  of  value  for  alt 

times  and  places 88 

CHAPTER  VIII 

SENIOR 

{  i.  Opening  of  his  discussion  very  unfavorable  to  old  labor  cost 

philosophy 93 

8  2,  Originates  a  consistent  conception  of  subjective  cost  of  produc- 
tion,— labor  and  abstinence 95 

\  3.  Approaches  a  theory  of  final  equivalence  of  utility  and  disutility.    96 

\  4.  Values  produced  would  be  in  proportion  to  subjective  cost  of 

production  were  there  no  rents 98 

{  5.  Remarkable  extension  of  the  rent  concept  ..'.'.'.'....    •   .  99 

\  6.  The  universal  prevalence  of  rent  in  real  life  nullifies  the  law  of 

subjective  costs • 101 

{  7.  Net  result  of  Senior's  reasonings  very  destructive  of  labor-cost 

theory '..'..'.'.".' 102 

CHAPTER  IX 

JOHN   STUART   MILL 

{  I.  Begins  with  "empirical"  laws  of  supply  and  demand,  and  of 

eriterpreheurs  costs  .'.,.'.' 104 

$  2.  Scant  attention  paid  to  subjective  cos'ts    .   .' 106 

$  3.  Wavers  concerning  inclusion  of  "profits"  in  cost:  an  illustra- 
tion of  the  inadequacy  of  the  ancient  philosophy  of  value  .  .  107 

{  4.  Follows  Ricardo,  without  the  slightest  improvement  in  his  ex- 
planation of  the  interest  complication 108 

'i  5.  Departs  from  Ricardo  in  admitting  that  case  of  skilled  labor 

necessitates  qualification  of  the  labor-cost  theory HO 

\  6.  Summary :  the  labor  theory  weakened ;  comparison  with  Mal- 
thus and  Senior 112 

CHAPTER  X 

CAIRNES 

\  I.  Cost  of  production,  as  ultimate  regulator  of  value,  defined  in 

purely  subjective  terms 114 


8  CONTENTS  [266 

PACK 

i  2.  Wages  and  interest,  being  rewards,  cannot  be  costs 116 

4  3.  Conception  of  the  "  average  sacrifice  " 117 

|  4.  The  problem  of  the  influence  of  subjective  cost  upon  exchange 

value,  more  clearly  stated  than  ever  before 118 

{5.  The  theory  of  "  non-competing  groups  " IIQ 

$  6.  Consequent  limitation  of  law  of  costs 120 

$  7.  And  resort  to  a  principle  of  "reciprocal  demand,"  which  fails 

to  replace  the  law  of  costs 121 

{  8.  Cairnes'  theory  of  non-competing  groups  signifies  that  the  ex- 
istence of  skilled  labor  is  fatal  to  the  Ricardian  labor  theory  .  123 
I  9.  Ricardo's  assumption  of  perfect  competition  does  not  foreguard 

against  the  difficulty  of  skilled  labor 124 

CHAPTER  XI 

THE  ULTIMATE   RELATION   OF   COST  TO  VALUE 

|  I.  Net  result  of  English  discussion  from  Smith  to  Cairnes  .  .  .  127 

I  2.  Classification  of  cost  concepts 135 

{  3.  Necessary  preliminaries  concerning  the  concepts  of  value  and 

utility 140 

i  4.  Essential  features  of  the  pure  utility  theory ;  the  supply  of 

goods  taken  for  granted 146 

5  5.  Explanation  of  the  law  of  entrepreneur's  cost  in  the  light  of 

the  utility  theory 155 

}  6.  The  modern  refined  labor  theory — the  marginal  equivalence 

of    utility   and  disutility — considered    first    in    the   isolated 

economy •• 165 

J  7.  The  relation  of  marginal  subjective  cost  to  exchange  value  in 

the  developed  social  economy 177 

I  8.  Summary ' 191 


CHAPTER  1 

•GENERAL  OUTLINES  OF  THE  HISTORY  OF  THE  LABOR  THEORY 

OF   VALUE 

i.  THE  following  history  of  the  labor  theory  of  value 
begins  with  Adam  Smith,  not  because  it  is  supposed  that 
Political  Economy  was  born  with  the  Wealth  of  Nations, 
but  because  no  other  work  written  affords  so  convenient  a 
starting-point  to  the  historian  who  has  no  desire  to  press 
his  investigations  into  regions  too  remote  from  modern  in- 
terests. 

After  Adam  Smith,  the  writers  to  be  considered  are 
Ricardo  and  Malthus,  McCulloch,  James  Mill  and  Torrens, 
Senior,  John  Stuart  Mill,  and  Cairnes.  In  the  next  great 
treatise  after  that  of  Cairnes,  the  Principles  of  Economics  of 
Marshall,  there  is  nothing  left  of  the  labor  theory  of  value, 
except  a  note  at  the  end  of  a  chapter  on  the  general  theory 
of  the  equilibrium  of  supply  and  demand.1  This  note,  "On 
Ricardo's  Theory  of  Value,"  endeavors  to  state  the  ultimate 
relations  of  cost,  utility  and  value  in  such  a  manner  that 
Ricardo's  explanation  of  value  is  made  to  appear  as  a  state- 
ment true  as  far  as  it  goes,  which  errs  only  in  being  incom- 
plete, and  which  is  completed,  not  refuted,  by  the  utility 
theory.  This  view  will  be  taken  up  in  the  last  chapter  of 
the  present  essay.  But  no  separate  chapter  is  devoted  to 
Professor  Marshall's  work,  because,  as  a  matter  of  fact,  the 
Ricardian  labor  theory  finds  no  place  in  the  text  of  his  Prin- 
ciples. From  Smith  to  Cairnes,  the  list  of  writers  given 

'Chap,  xiv  of  book  v,  4th  ed.,  1898,  pp.  554-570. 
267]  9 


I0          LABOR  THEORY  OF  VALUE         [268 

above  was  selected  as  well  calculated  to  exhibit  the  general 
line  of  development  of  English  political  economy.  No 
attempt  has  been  made  to  discover  writers  outside  of  this 
list,  although  it  is  not  denied  that  such  writers  may  not  at 
present  receive  due  credit  for  their  influence  upon  the  de- 
velopment of  economic  theory.  Making  no  attempt  at  what 
might  be  called  a  discursive  or  extensive  study  of  the  field, 
this  history  will  be  confined  to  an  intensive  study  of  the 
chief  writers.  If  it  be  found  that  certain  of  the  above  list 
of  writers  contributed  nothing  but  error  to  the  theory  of 
value — and  such  is  the  case  with  three  of  them — even  such 
a  conclusion  is  deemed  to  be  of  historical  value. 

2.  With  the  limits  of  our  field  thus  defined,  attention 
should  first  be  called  to  a  fairly  prevalent,  but  mistaken, 
impression  regarding  the  so-called  classical  labor  theory  of 
value.  It  is  frequently  assumed  that  this  theory  of  value 
was  a  simple  and  absolute  dictum,  supported  in  substantial 
unanimity  by  a  considerable  body  of  writers,  called  collec- 
tively "  the  classical  school."  There  is,  no  doubt,  sufficient 
resemblance  among  these  writers  in  their  general  tendencies 
of  thought  to  justify  the  term  "  classical  school;"  but  with 
respect  to  their  views  on  the  central  problem  of  value,  it  is 
their  differences  of  opinion  that  at  present  need  emphasis, 
just  as  it  is  these  differences  which  take  the  modern  reader 
by  surprise  when  he  first  undertakes  a  detailed  study  of  their 
writings.  Instead  of  finding  the  minds  of  the  early  Eng- 
lish economists  dominated  by  a  single  labor  theory,  having 
the  merit  of  great  directness  and  simplicity,  the  historian  of 
the  theory  is  confronted  with  an  appalling  jumble  of  ideas 
on  the  relation  of  labor  to  value.  Ricardo,  it  is  true,  de- 
fended the  simple  thesis  that  the  exchange  value  of  a  com- 
modity is  governed  by  its  cost  of  production  in  labor,  but  it 
is  sometimes  forgotten  that  he  hedged  this  doctrine  about 
with  several  important  qualifications  and  conditions.  Fur- 


269]  GENERAL  OUTLINES  II 

thermore,  there  was  not  a  contemporary  or  subsequent  writer 
who  did  not  differ  from  Ricardo  in  important  points  of 
theory.  Taking  Smith,  Malthus,  Ricardo,  McCulloch,  Tor- 
rens,  and  James  Mill  together,  we  find  labor  sometimes  con- 
ceived of  as  disutility  cost,  at  other  times  as  productive 
power,  without  any  recognition  of  the  distinction  between 
these  concepts.  Yet  this  distinction  may  be  of  great  im- 
portance in  certain  propositions  of  theory.  We  find  Mc- 
Culloch at  one  time  claiming  that  the  value-determining 
labor  employed  in  the  production  of  a  commodity  includes 
the  operations  of  machines  and  inanimate  objects,  which  are 
"  philosophically  just  as  truly  labor  as  human  exertions." 
Torrens  maintained  that  value  is  governed  by  cost  of  pro- 
duction in  "  accumulated  "  labor,  and  James  Mill  held  in- 
terest on  capital  to  be  really  wages  of  labor,  an  absurd 
thought  absolutely  foreign  to  Ricardo's  theory.  In  addi- 
tion to  the  labor-cost  regulator  of  value,  there  was  the  labor- 
command  measure  of  value,  the  measure  of  the  value  x  of  a 
good  for  all  times  and  places,  alleged  to  be  afforded  by  the 
amount  of  labor  which  could  be  commanded  by  it  or  had 
in  exchange  for  it.  The  principal  defender  of  this  measure, 
Malthus,  did  not  believe  in  the  labor-cost  regulator.  It  was 
asserted  that  the  "  value  of  labor  "  is  the  same  in  all  times 
and  places.  When  this  value  is  inadvertently  identified  with 
exchange  value,  which  must,  of  course,  be  measured  by  the 
commodity  wages  of  labor,  some  highly  interesting  argu- 
ments are  necessitated  to  show  that  real  wages  are  in  some 
sense  or  other  the  same  in  all  times  and  places,  in  spite  of 
the  fact  that,  as  commonly  understood,  they  are  by  no  means 
the  same.  We  find  a  "  corn  measure  "  of  value  first  pro- 
posed as  a  convenient  index  to  the  true  labor  measure.  But, 

1  Value  was  in  this  connection  used  in  another  sense  than  pure  ex- 
change value,  but  the  difference  of  significance  was  never  satisfactorily 
explained. 


I2  LABOR  THEORY  OF  VALUE          [270 

strange  to  say,  later  we  run  upon  a  proposal  to  take  an 
"arithmetic  mean  between  corn  and  labor"  (i.  e.,  between 
their  prices)  as  the  "  least  defective  measure  "  of  "  intrinsic 
value  in  exchange."  Cost  of  production  was  used  without 
any  distinguishing  adjectives  to  indicate  concepts  so  distinct 
as  entrepreneur's  cost  and  labor  cost  (presumably  "  disutil- 
ity cost").  In  consequence  there  arose  a  dispute,  which 
was  at  the  time  nearly  unintelligible,  as  to  whether  or  not 
profits  (i.  e.,  interest  on  capital)  are  a  part  of  cost  of  pro- 
duction. 

3.  In  the  confusion,  a  few  main  lines  of  thought  can  be  dis- 
cerned. There  is  a  theory  of  value  regulation,  and  there  is 
a  theory  of  value  measurement,  which  is,  as  Malthus  and 
others  pointed  out,  a  distinct  thing  from  value  regulation. 
The  classical  theory  of  value  regulation  was  composed  of 
two  separate  accounts.  That  is,  these  two  accounts  were 
of  distinct  origin  and  nature,  and  should  have  been  kept 
distinct.  Instead  of  this  they  were  more  or  less  fused  and 
the  relation  between  them  was  always  clouded.  To  this  fact 
is  due  the  great  difficulty  all  must  experience  in  reaching  a 
complete  understanding  of  the  classical  theory.  Though  it 
is  for  this  reason  very  necessary  to  give  the  accounts  separ- 
ate names,  it  seems  impossible  to  find  unobjectionable  terms. 
Professor  von  Wieser,  from  whom  I  have  taken  the  idea 
that  the  confusion  between  these  two  accounts  is  the  key  to 
the  history  of  the  labor  theory  of  value,  distinguishes  them 
by  the  terms  "  philosophical  "  and  "  empirical."  * 

1  Natural  Value,  edited  by  Wm.  Smart  (London,  1893),  pp.  xxvii- 
xxix.  Von  Wieser  gives  but  three  pages  of  the  preface  of  Natural 
Value  to  the  writings  of  Adam  Smith  and  Ricardo  on  value.  But  in 
this  brief  though  profound  passage,  he  has  not  only  suggested  what  I 
believe  to  be  the  true  interpretation  of  the  theories  of  Smith  and  Ri- 
cardo, but  he  has  also  made  the  greatest  single  contribution  to  our 
understanding  of  the  subsequent  course  of  English  thought  on  the 
subject. 


271]  GENERAL  OUTLINES  £3 

Adopting  these  names,  in  default  of  better,  the  "  philo- 
sophical "  account  is  the  answer  of  the  fathers  of  modern 
political  economy  to  the  general  riddle  of  value,  the  riddle 
of  its  ultimate  nature,  or  essence.  At  first  blush  it  would 
seem  that  things  must  derive  their  value  from  their  useful- 
ness. But  almost  immediately  the  mind  turns  to  the  fact, 
which  has  since  "  classical "  days  become  such  a  time- 
honored  illustration,  that  bread  is  "more  useful  "  than  gold, 
but  much  less  valuable.  The  usefulness  of  bread,  as  it  is 
here  understood,  is  its  general  or  characteristic  usefulness, 
its  usefulness  as  a  class  of  things,  its  power  to  preserve  our 
health  and  strength.  Meditating  upon  the  importance  of 
the  entire  class  of  utilities  represented  by  bread,  one  is  led  to 
ignore  the  question  whether  the  specific  utility  of  a  partic- 
ular piece  of  bread,  in  the  given  circumstances  of  the  supply 
of  bread,  is  not  less  than  the  specific  usefulness  of  a  par- 
ticular piece  of  gold  for  purposes  of  ornament,  in  the  given 
circumstances  of  the  supply  of  gold.  This  is  the  line  of 
inquiry  which  leads  to  the  utility  theory.  But  having 
passed  the  place  where  this  road  branches  off,  the  earlier 
speculation  on  value  reached  the  conclusion  that  things 
possessing  utility  have  their  values  determined  by  their  cost 
in  labor.  This  answer  to  the  riddle  seems  foreordained, 
when  once  Adam  Smith's  "  value  in  use  "  is  adopted  as  the 
sole  conception  of  utility.  Elaboration  and  illustration  of 
this  philosophy  always  leads  to  primitive  and  "  natural  " 
society,  where  the  hunter  and  fisherman,  rent-free  and  equal, 
exchange  the  products  of  their  labor  as  measured  in  days. 
When,  however,  the  attention  turns  to  the  market-price  of 
goods  in  the  actual  world,  it  is  observed  as  a  matter  of  busi- 
ness experience,  in  contrast  with  speculation  with  regard  to 
the  essence  of  things,  that  the  exchange  value  of  commodi- 
ties tends  to  equal  the  sum  of  the  wages  of  labor,  the 


14  LABOR  THEORY  OF  VALUE  [272 

"  profits  "  of  stock,  and  the  rent  of  land  *  which  must  be 
paid  to  obtain  their  production.  This  is  the  "  empirical  " 
account.  The  principle  discovered  is  that  now  known  as 
the  law  of  entrepreneur's  costs.2 

The  central  idea  in  the  "  philosophical  "  account  is  that 
labor-cost  is  the  essence  of  value.  It  appeals  primarily  to 
the  reader's  introspective  judgment  for  confirmation.  The 
primitive  state  of  society  by  which  it  is  illustrated  is  quite 
imaginary.  The  "  empirical  "  account  is  an  outwardly  ob- 
served tendency  of  market  competition.  In  the  progress  of 
the  thought  of  English  economists  upon  value,  the  "  philo- 
sophical "  labor-cost  account  becomes  more  and  more  atten- 
uate, until  in  the  Principles  of  Professor  Marshall,  as  before 
observed,  nothing  remains  of  it  but  a  note  on  "  Ricardo's 
Theory  of  Value."  Professor  Marshall's  general  theory  of 
the  equilibrium  of  normal  demand  and  supply  is  the  classical 
"  empirical  "  account  enlarged  and  greatly  improved,  with 
some  of  the  more  general  laws  of  the  newer  utility  theory 
incorporated  into  the  whole  to  serve  as  the  ultimate  prin- 
ciples of  demand.  While  the  "  philosophical  "  account  was 
fading  away,  the  "  empirical  "  account  was  becoming  vir- 
tually the  whole  theory  of  value.  Strange  to  say,  Ricardo 
contributed  very  little  to  the  advancement  of  the  empirical 
account  as  such.  The  direct  line  of  descent  of  this  doctrine 
is  traceable  from  Smith's  Wealth  of  Nations,  through  the 
Principles  of  Malthus  and  J.  S.  Mill,  to  Marshall.  Neither 
Ricardo  nor  Cairnes  can  be  considered  to  stand  in  the  line.* 

1  Rent  of  land  was  excluded  by  Ricardo,  but  included  by  Smith  and 
Malthus,  and  also  by  J.  B.  Say. 

*The  Austrian  writers  are  accustomed  to  call  this  the  "empirical  law 
of  costs." 

8 The  detailed  history  given  in  the  following  chapters  will,  it  is  be- 
Keved,  substantiate  this  view.  The  development  of  the  law  of  entrepre- 
neur's costs  will  be  traced  only  so  far  as  is  necessary  in  order  to  under- 


273]  GENERAL  OUTLINES  15 

Adam  Smith  and  Malthus  considered  ground-rent  to  be 
a  "  component  part "  of  entrepreneur's  cost  (not  that  they 
employed  the  term  entrepreneur's  cost),  co-ordinate  with 
wages  and  "  profits  of  stock."  Ricardo  never  stated  a  law 
of  entrepreneur's  cost  plainly,  formally,  as  such,  though  he 
gave  it  an  obscure  recognition  as  a  source  of  difficulty  to  the 
pure  labor  theory  of  value.  But  he  influenced  its  form  pro- 
foundly, for  when  the  doctrine  passed  into  the  hands  of 
J.  S.  Mill,  the  latter  removed  the  rent  of  land  from  among 
the  elements  of  cost,  leaving  wages  and  interest.1 

While  many  points  of  detail  will  appear  in  the  following 
pages,  it  will  be  found  necessary  to  trace  the  relations  of 
the  two  great  accounts  of  value,  the  "  philosophical "  and 
the  "  empirical,"  in  the  writings  of  every  economist  here- 
after considered. 

stand  the  history  of  the  labor  theory,  but  it  is  indispensable  to  follow 
the  general  lines  of  its  progress  if  we  are  to  perceive  the  "setting" 
of  the  labor  theory. 

1  Mill  granted  certain  exceptions  to  the  proposition  that  rent  cannot 
"enter  into  price,"  but  placed  no  emphasis  upon  them. 


CHAPTER  II 

ADAM  SMITH'S  PHILOSOPHICAL  OR  PRIMITIVE  ACCOUNT  OF 

VALUE. 

i.  THERE  is  a  veritable  multiplicity  of  explanations  of 
value  in  the  Wealth  of  Nations,  which  makes  a  history  of 
Adam  Smith's  views  on  this  subject  extremely  difficult  writ- 
ing. Many  a  wise  or  philosophical  sort  of  observation 
may  be  correct  in  a  general  way,  or  largely  true,  and  yet  not 
be  precisely  true.  Perhaps  the  greater  part  of  what  Adam 
Smith  has  said  on  the  nature  of  value  consists  of  reflections 
of  this  kind,  and  the  student  of  his  text  can  never  be  certain 
that  he  really  planned  to  describe  the  laws  of  value  with  that 
precision  which  modern  theory  at  least  hopes  to  attain. 
Still  there  are  some  exact  theorems  laid  down.  The  lan- 
guage in  which  these  are  expressed  is  uniformly  flowing 
and  makes  good  reading;  but  it  seems  to  be  more  an  elo- 
quent appeal  against  the  shallow  mercantilist  view  of  wealth, 
than  an  attempt  at  a  painstaking  analysis  of  the  facts  of 
value.  The  following  thoroughly  typical  passage  from  the 
chapter,  "Of  the  Real  and  Nominal  Price  of  Commodities, 
or  of  their  Price  in  Labor  and  their  Price  in  Money,"  is 
truly  a  call  to  people  to  look  away  from  money  as  the  sole 
measure  of  wealth  and  regard  the  real  source  of  wealth. 
But  in  spite  of  this  it  happens  to  end  in  a  precise  proposition 
or  theory  of  value : 

"  Wealth,  as  Mr.  Hobbes  says,  is  power.     But  the  person 
who  either  acquires,  or  succeeds  to  a  great  fortune,  does  not 
16  [274 


275]       ADAM  SMITH'S  PHILOSOPHICAL  ACCOUNT  if 

necessarily  acquire  or  succeed  to  any  political  power,  either 
civil  or  military.  *  *  *  *  The  power  which  that  posses- 
sion immediately  and  directly  conveys  to  him,  is  the  power 
of  purchasing,  a  certain  command  over  all  the  labour,  or  over 
all  the  produce  of  labour  which  is  then  in  the  market.  His 
fortune  is  greater  or  less,  precisely  in  proportion  to  the  extent 
of,  his  power;  or  to  the  quantity  either  of  other  men's  labour, 
or,  what  is  the  same  thing,  of  the  produce  of  other  men's 
labour,  which  it  enables  him  to  purchase  or  command.  The 
exchangeable  value  of  everything  must  always  be  precisely  equal 
to  the  extent  of  this  power  which  it  conveys  to  its  owner." 

From  which  Adam  Smith  concludes  that  labor  is  "  the  real 
measure  of  the  exchangeable  value  of  all  commodities." 
The  exact  meaning  of  the  conclusion,  it  must  be  observed, 
is  not  plain.  If  "  exchangeable  value "  meant  mere  ex- 
change value  in  the  modern  sense — the  power  of  a  good  to 
exchange  for  some  quantity  of  another  good  objectively 
measured  in  weight,  volume,  or  length — then  money  would 
afford  a  measure  of  this  value  quite  as  reliable  as  labor  and 
far  more  convenient.  What  is  intended  by  "  exchangeable 
value  "  is  a  question  we  may  approach  later,  but  whatever 
exact  meaning  we  take  for  this  term,  we  find  that  the  series 
of  general  observations  preceding  the  conclusion  does  not 
prove  this  conclusion  as  a  precise  proposition.  This  pas- 
sage is  typical  of  the  chapter.  Painstaking  study  of  Smith's 
theory  or  theories  of  value  is  also  made  difficult  by  occa- 
sional lapses  into  very  loose  terminology.  For  an  instance, 
we  find  the  sentence,  "  equal  quantities  of  labor,  at  all  times 
and  places,  may  be  said  to  be  of  equal  value  to  the  laborer."  * 

1  Wealth  of  Nations,  2d  Thorold  Rogers  ed.,  1880,  pp.  31-2.     All  sub- 
sequent page  references  are  to  this  edition,  volume  i. 

8  P.  34- 


!g  LABOR  THEORY  OF  VALUE          [276 

The  context  shows  that,  in  all  probability,  value  here  means 
disutility  .* 

The  several  different  minor  theories  of  value  given  by 
Adam  Smith  are  not  woven  into  a  whole  by  him.  The  stu- 
dent of  his  views  approaches  his  great  work  with  a  respect 
that  amounts  to  awe,  and  it  takes  time  to  force  himself  to 
the  conclusion  that  there  is  a  part  of  the  Wealth  of  Nations 
which,  though  profoundly  suggestive,  is  not  entirely  con- 
sistent. The  attempt,  instinctively  made  by  the  commen- 
tator, to  find  a  hidden  consistency  behind  the  various  in- 
compatible utterances,  to  discover  a  hypothesis  upon  which 
the  contradictions  may  be  declared  apparent  only,  is,  accord- 
ing to  the  belief  of  the  writer,  fore-doomed  to  complete 
failure. 

Within  the  plurality  of  explanations  of  value  two  main 
divisions  are  discernible,  the  first  contained  in  Chapter  V, 
and  the  second  in  Chapters  VI  and  VII  of  Book  I.2  These 
are  the  "  philosophical  "  and  the  "  empirical  "  accounts  dis- 
tinguished in  the  first  chapter  of  this  essay.  The  first  of 
these  is  in  its  place  stated  in  general  terms,  as  if  uncondi- 
tionally true,  but  when  the  empirical  account  is  reached,  a 
considerable  part  of  what  had  been  said  previously  is  re- 
stricted to  "  that  early  and  rude  state  of  society  which  pre- 
cedes both  the  accumulation  of  stock  and  the  appropriation 
of  land."  3  For  this  reason  what  has  been  called  the  "  phil- 

1  Referring  to  the  words  just  quoted,  Mr.  Ingram  says:  "This  sen- 
tence, which  on  close  examination  will  be  found  to  have  no  definite  in- 
telligible sense,  affords  a  good  example  of  the  way  in  which  metaphysical 
modes  of  thought  obscure  economic  ideas."  History  of  Political 
Economy,  p.  94,  note. 

sChap.  v.  "Of  the  Real  and  Nominal  Price  of  Commodities,  or  of 
their  Price  in  Labour  and  their  Price  in  Money."  Chap.  vi.  "Of  the 
Component  Parts  of  the  Price  of  Commodities."  Chap.  vii.  "Of  the 
Natural  and  Market  Price  of  Commodities." 

SP.  49.  At  the  same  time  many  important  assertions  in  the  "philo- 
sophical account"  are  not  restricted  to  primitive  conditions. 


277]       ADAM  SMITH'S  PHILOSOPHICAL  ACCOUNT  19 

osophical,"  may,  in  the  case  of  Adam  Smith,  also  be  called 
the  "  primitive  "  account  of  value. 

2.  Preparatory  to  taking  up  the  philosophical  account,  a 
few  words  on  the  use  of  the  terms  labor  and  value  are  per- 
tinent. The  word  labor,  now  as  formerly,  denotes  really 
two  distinct,  though  related,  things.  One  is  the  productive 
power  of  human  beings.  For  instance,  labor  and  natural 
agents  are  called  factors  in  production,  or  it  is  said  that  the 
entrepreneur  purchases  labor.  The  other  is  the  disutility 
or  discomfort  endured  by  men  in  the  course  of  production, 
as  in  the  sentence :  "  This  article  has  cost  me  much  labor." * 
Productive  power  may  be  accompanied  by  no  disutility,  or 
by  moderate  or  high  disutility,  according  to  circumstances. 
Labor  is  used  in  both  senses  by  Adam  Smith.  As  for  the 
word  value,  Smith  explains  at  the  outset  that  the  term  has 
two  meanings,  "  value  in  use  "  and  "  value  in  exchange," 
and  restricts  his  investigations  to  the  principles  of  the 
"  exchangeable  value."  This  is  defined  as  the  "  power  of 
purchasing  other  goods  "  which  an  object  "  conveys  "  to  its 
owner.2  But  Adam  Smith  does  not  explain  nor  appear  to 
realize  that  he  uses  the  term  "  exchangeable  value  "  in  two 
senses.  When  he  asserts  that  the  "  real  worth  "  of  any- 
thing to  a  man  "  is  the  toil  and  trouble  which  it  can  save 
himself,  and  which  it  can  impose  on  other  people,"  and  that 
therefore  labor  is  the  real  measure  of  the  "  exchangeable 
value  of  all  commodities;"  "exchangeable  value"  means 
something  other  than  mere  purchasing  power.  Writing 

1  It  is  true  that  an  article's  cost  in  labor  may  instead  mean  its  cost  in 
productive  power.  The  cost  in  this  case  is  at  bottom  the  utility  of  some 
other  article  which  might  have  been  created  by  this  productive  power 
had  it  not  been  employed  in  making  the  first  article.  In  the  same  sense 
we  speak  of  a  thing  as  costing  money. 

1  P.  29,  in  chap.  iv. 


20  LABOR  THEORY  OF  VALUE  [278 

nearly  a  century  later,  Meiiger  said  that  value  is  that  sig- 
nificance (Bedeutung)  which  a  good  attains  in  our  estima- 
tion when  we  feel  the  satisfaction  of  some  want  to  be  con- 
ditioned upon  it.  This  is  "esteem  value,"  or  value  as 
Bedeutung.  Smith's  concept,  of  value  as  "  real  worth," 
which  he  has  miscalled  "  exchangeable "  value,  is  some- 
thing analogous  to  this.  But  Smith  finds  the  significance 
in  labor  instead  of  in  satisfaction.1 

3.  Turning  now  directly  to  the  "philosophical"  account, 
we  find  the  multiplicity  of  Adam  Smith's  explanations  of 
value  illustrated  once  more  by  the  fact  that  within  this 
chapter  he  suggests  two  distinct  labor  standards.  One  is 
given  as  a  regulator  of  value,  a  something  which  quantita- 
tively governs  value.  The  other  is  merely  a  measure  of 
value.  There  is  no  adequate  discussion  of  the  mutual  rela- 
tions of  the  two.  Both  appear  in  the  following  sentence: 

"  What  everything  is  worth  to  the  man  who  has  acquired 
it,  and  who  wants  to  dispose  of  it  or  exchange  it  for  some- 
thing else,  is  the  toil  and  trouble  which  it  can  save  to  himself, 
and  which  it  can  impose  on  other  people."  2 

The  "  toil  "  saved  "  to  himself  "  must  be  the  labor  cost  of 
reproduction,  not  distinguished  by  Smith  from  cost  of  pro- 
duction. The  two  standards  are  asserted  separately.  In 
an  early  and  rude  state  of  society, 

"  the  proportion  between  the  quantities  of  labour  necessary  for 
acquiring  different  objects  seems  to  be  the  only  circumstance 

1  It  has  been  suggested  by  many  writers  that  the  germ  of  practically 
every  theory  of  value  is  found  in  the  Wealth  of  Nations.  That  is  prob- 
ably true,  if  we  except  the  utility  theory,  which  associates  quantity  of 
value  with  quantity  of  utility,  a  conception  absolutely  foreign  to  Adam 
Smith's  thought. 

2P.  31. 


279]       ADAM  SMITH'S  PHILOSOPHICAL  ACCOUNT  2I 

which    can   afford    any    rule    for   exchanging-   them    for   one 

another."  1 

And 

"  at  all  times  and  places,  that  is  dear     *     *     *     *     which  it 
costs  much  labour  to  acquire."  2 

And  again: 

"  The  value  of  any  commodity  to  the  person  who  possesses 
it  [and  wishes  to  exchange  it]  is  equal  to  the  quantity  of  labour 
which  it  enables  him  to  purchase  or  command.  Labour,  there- 
fore, is  the  real  measure  of  the  exchangeable  value  of  all 
commodities."  3 

The  first  of  these,  in  accordance  with  which  it  is  asserted 
that  value  is  governed  (in  the  philosophical  primitive  con- 
ditions) by  cost  in  labor,  may  be  called  the  labor-cost  stand- 
ard. The  second  finds  a  convenient  name  as  the  labor-com- 
mand standard.4'  The  two  play  separate  and  important 
parts  in  the  subsequent  history  of  the  labor  theory  of  value. 
Ricardo  adopted  the  labor-cost  standard  as  applicable  to  the 
conditions  of  advanced  or  capitalistic  society  and  repudi- 
ated the  labor-command  measure.  Malthus,  on  the  con- 
trary, defended  the  latter  and  rejected  the  former.5 

'P.  49-  2P-  34-  SP.  30. 

4  In  this  instance  the  word  "standard"  is  used  in  a  sense  sufficiently  gen- 
eral to  include  a  regulator  (i.  e.,  a  measuring  cause)  and  a  mere  meas- 
ure.    A  standard  is  "i.  Any  measure  of  extent,  quantity,  quality  or 
value."  ...  "2.  Any  fact,  thing  or  circumstance  forming  a  basis  for 
adjustment  and  regulation."     Standard  Dictionary. 

5  What  Adam  Smith  has  to  say  of  the  relation  of  these  standards,  one 
to  the  other,  comes  in  connection  with  the  account  for  advanced  society, 
where  he  discards  the  labor-cost  standard  but  retains  the  labor-command 
measure. 


22  LABOR  THEORY  OF  VALVE          [2go 

4.  Since  the  amount  of  the  value  of  a  good  is  asserted  to 
bear  certain  definite  relations  to  the  amount  of  labor  it  costs 
or  commands,  it  is  a  very  proper  question  to  inquire  how 
quantity  of  labor  is  measured  in  any  particular  case.  Adam 
Smith  remarks  that  the  quantity  of  money  for  which  a  good 
can  be  exchanged  is  "  a  plain  palpable  object,"  but  that  the 
quantity  of  labor  which  it  commands,  indirectly  through  the 
use  of  money  is  "  an  abstract  notion,  which,  though  it  can 
be  made  sufficiently  intelligible,  it  (sic)  is  not  altogether  so 
natural  and  obvious."  He  suggests,  in  that  most  excellent 
and  familiar  Smithian  sentence,  that  the  proportions  in 
which  different  concrete  kinds  of  labor  exchange  (or  count 
for  quantity  of  labor  in  general  or  in  the  abstract)  are 

"  adjusted  not  by  any  accurate  measure,  but  by  the  higgling 
and  bargaining  of  the  market,  according  to  that  sort  of  rough 
equality  which,  though  not  exact,  is  sufficient  for  carrying 
on  the  business  of  common  life."  z 

Nevertheless  there  are  certain  principles  which  enable  us  to 
define  quantity  of  labor  in  a  general  way.  Time  alone  spent 
at  a  task  does  not  determine  the  quantity  of  labor  put  forth. 
The  different  degrees  of  hardship  endured  and  of  ingenuity 
exercised  in  different  employments  must  also  be  considered. 
If  we  should  assume  for  the  moment  that  there  were 
exact  units  of  disutility  and  skill  as  of  time,  Adam  Smith's 
theory  would  signify  that  the  quantity  of  labor  in  any  par- 
ticular case  is  measured  by  time  units  weighted  with  units 
of  disutility  and  of  skill.  The  amount  of  two  different 
kinds  of  labor  commanded  in  exchange  by  any  commodity 
depends  upon  the  wages  commonly  earned  at  these  kinds  of 
labor.  If  a  certain  commodity,  worth  such  and  such  a  sum 
of  money,  commands  in  exchange  one  day  of  labor  in  em- 

JP.  32. 


28i]       ADAM  SMITH'S  PHILOSOPHICAL  ACCOUNT  23 

ployment  A  and  two  days  in  employment  B,  Adam  Smith 
would  be  forced  to  assume  that  one  day  of  A  is  the  same 
quantity  of  labor  as  two  days  of  B.  At  bottom,  then,  the 
theory  means  that  one  day  of  A  is  the  same  quantity  of 
labor  as  two  days  of  B,  because  these  two  pieces  of  labor 
get  the  same  wages. 

Taking  it  for  granted  that  the  amount  of  wages  pnid 
(under  competitive  conditions)  is  a  true  test  of  the  quantity 
of  labor  in  any  given  concrete  task,  we  shall  find  some  fur- 
ther speculation  on  this  question  if  we  turn  to  the  famous 
chapter  upon  the  inequality  of  wages  in  different  employ- 
ments.1 In  this  chapter  there  is  a  suggestion  that  the  extra 
reward  for  skilled  labor  is  a  disguised  payment  for  superior 
disutility.  The  following  analogy  drawn  between  skill  and 
a  machine  has  been  used  by  many  later  writers : 

"  When  any  expensive  machine  is  erected,  the  extraordinary 
work  to  be  performed  by  it  before  it  is  worn  out,  it  must 
be  expected,  will  replace  the  capital  laid  out  upon  it,  with  at 
least  the  ordinary  profits.  A  man  educated  at  the  expense  of 
much  labour  and  time  to  any  of  those  employments  which  re- 
quire extraordinary  dexterity  and  skill,  may  be  compared  to 
one  of  those  expensive  machines.  The  work  which  he  learns 
to  perform,  it  must  be  expected,  over  and  above  the  usual 
wages  of  common  labour,  will  replace  to  him  the  whole  ex- 
pense of  his  education,  with  at  least  the  ordinary  profits 
of  an  equally  valuable  capital.  *  *  *  The  difference  be- 
tween the  wages  of  skilled  labour  and  those  of  common  labour 
is  founded  upon  this  principle."  2 

Thus  skill  represents  disutility  incurred  in  its  acquisition, 
and  the  surplus  reward  to  skill  is  virtually  reward  to  dis- 
utility in  a  form  bearing  analogies  to  interest.  This  is  for 
acquired  skill.  What  is  to  be  said  of  inborn  skill,  of  native 
1  Chap,  x,  of  book  i.  "  P.  106. 


24  LABOR  THEORY  OF  VALUE          [282 

superior  talents?  This  question  apparently  escapes  Adam 
Smith.  Uniformly,  the  tacit  assumption  underlying  his 
thought  seems  to  be  that  of  the  inborn  equality  of  powers 
in  men.  Keeping  this  assumption  in  mind,  we  see  that 
Smith's  view  amounts  to  the  theory  that  all  occupations  are 
about  equally  well  rewarded,  all  things  considered.  Higher 
wages  are  paid  only  where  there  is  more  labor,  ultimately  in 
the  sense  of  disutility.  The  inequalities  of  wages  are  such 
only  in  proportion  to  the  time  of  labor.1 

To  give  a  mid-chapter  summary  of  results — put  together 
by  ourselves  rather  than  by  Smith — if  the  exchange  values 
of  goods  are  to  be  governed  by  the  quantity  of  labor  which 
they  have  cost,  and  the  "  real  worth  "  of  goods  is  to  be 
measured  either  by  the  quantity  of  labor  they  have  cost  or 
by  that  which  they  can  command  in  exchange,  there  must  be 
some  means  of  defining  the  quantity  of  labor  in  different 
employments.  Adam  Smith  has  made  this  depend,  in  the 
first  instance,  upon  time  compounded  with  amounts  of  dis- 
utility and  skill.  But  he  has  further  suggested  that  the 
element  of  skill  really  represents  a  past  disutility.  The 
principal  assumption  involved  is  that  all  occupations  are 
competed  for  by  men  born  equal  in  efficiency.  If  he  did 
not  clearly  avoid  the  appearance  of  laying  down  hard  and 
fast  principles,  we  could  conclude  that  he  meant  quantity  of 
disutility  by  quantity  of  labor. 

5.  The  dictum  that  labor  is  the  means  of  measuring  the 
"  real  worth  "  of  goods  does  not,  I  believe,  necessarily  in- 

1  In  one  place  Smith  puts  forward  a  naive  and  uncritical  explanation 
of  the  reward  to  skill,  comparable  to  his  explanation  of  the  division  of 
labor  as  due  to  a  propensity  of  men  to  truck  and  barter.  "If  ...  one 
species  of  labour  requires  an  uncommon  degree  of  dexterity  and  inge- 
nuity, the  esteem  which  men  have  for  such  talents  will  naturally  give  a 
value  to  their  produce  superior  to  what  would  be  due  to  the  time  em- 
ployed about  it."  P.  49. 


283]       ADAM  SMITH'S  PHILOSOPHICAL  ACCOUNT  25 

volve  the  notion  that  this  measure  can  be  used  to  compare 
the  value  of  a  good  in  A.  D.  1400  with  its  value  in  1800,  or 
its  value  in  China  with  that  in  England.  An  important 
part  of  the  chapter  on  the  real  and  nominal  price  of  com- 
modities is  given  over  to  the  claim  that  labor  furnishes  an 
"  invariable  measure "  of  value  in  all  times  and  places. 
Money,  the  most  convenient  measure  of  value  in  a  given 
time  and  place,  varies  in  its  value  in  different  times  and 
places.  But 

"  Equal  quantities  of  labour,  at  all  times  and  places,  may  be 
said  to  be  of  equal  value  to  the  labourer.  In  his  ordinary  state 
of  health,  strength  and  spirits,  in  the  ordinary  degree  of  his 
skill  and  dexterity,  he  must  always  lay  down  the  same  portion 
of  his  ease,  his  liberty,  and  his  happiness.  The  price  which 
he  pays  must  always  be  the  same,  whatever  may  be  the  quantity 
of  goods  which  he  receives  in  return  for  it.  *  *  *  Labour 
alone,  therefore,  never  varying  in  its  own  value,  is  alone  the  ulti- 
mate and  real  standard  by  which  the  value  of  all  commodities 
can  at  all  times  and  places  be  estimated  and  compared."  * 

In  this  passage  the  misuse  of  the  word  value  is  flagrant, 
but  the  meaning  is  plain.  No  matter  what  be  the  physical 
quantity  of  goods  which  a  day  of  labor  either  produces  or 
earns  as  wages,  the  value  of  these  goods,  in  the  sense  of 
significance  to  human  welfare,  is  the  same,  because  they 
cost  the  same  amount  of  disutility.  The  person  who  pur- 
chases labor  commands  it  sometimes  with  a  greater  and 
sometimes  with  a  lesser  amount  of  goods : 

"  It  appears  to  him  dear  in  the  one  case,  and  cheap  in  the 
other.  In  reality,  however,  it  is  the  goods  which  are  cheap  in 
the  one  case  and  dear  in  the  other."  : 

'P.  34.  *lbid. 


26  LABOR  THEORY  OF  VALUE          [284 

The  question  of  an  absolute  measure  or  unit  of  value 
(whether  it  is  incapable  of  solution  or  not)  is  one  which 
will  be  avoided  in  this  essay  as  far  as  exhaustive  or  critical 
discussion  is  concerned.  The  purely  statical  part  of  the 
classical  theories  of  value  is  best  considered  in  isolation, 
and  furthermore  the  question  of  an  absolute  measure  is  one 
of  such  extreme  difficulty  that  it  would  require  a  separate 
essay  of  much  greater  dimensions  than  this  history.  Mal- 
thus  examined  the  question  at  great  length,  and  Ricardo 
paid  some  attention  to  it.  A  brief  resume  of  the  classical 
discussion  of  this  problem  will  be  found  in  the  note  at  the 
end  of  Chapter  VII. 

It  may  be  of  interest  to  note  that  Adam  Smith  virtually 
contradicts  the  assertion  made  in  the  citation  last  given  by 
his  statement  four  lines  later  :  "  The  labourer  is  rich 
or  poor,  is  well  or  ill  rewarded,  in  proportion  to  the 
real  *  *  *  *  price  of  his  labour."  x  This  leads  to 
irreconcilable  contradictions.  Smith  has  said  that  a  man 
is  rich  or  poor  according  to  the  quantity  of  labor  which 
his  goods  enable  him  to  command.  That  is,  the  "  real 
value  "  of  a  thing  is  measured  by  the  amount  of  labor 
for  which  it  will  exchange.  Thus  a  man  is  rich  or  poor 
according  to  the  "  real  value  "  of  his  possessions.  A  chang- 
ing physical  quantity  of  goods  will  have  the  same  "  real 
value  "  if  it  command  the  same  quantity  of  labor.  There- 
fore a  given  quantity  of  labor  must  always  exchange  for  the 
same  amount  of  riches  in  the  sense  of  this  word  employed 
by  Smith.  If  the  real  wages  of  a  day  of  labor  must  always 
be  the  same  quantity  of  riches,  how  can  the  laborer  be  richer 
or  poorer  according  as  the  physical  quantity  of  the  goods  of 
his  real  wages  increases  or  diminishes?  It  might  be  said 
that  Smith  means  that  the  laborer  will  be  richer  in  life's  en- 


35- 


285]       ADAM  SMITH'S  PHILOSOPHICAL  ACCOUNT  2? 

joyments  if  he  receives  a  larger  physical  quantity  of  goods 
as  wages.  But  Smith  is  estopped  from  such  a  statement 
because  he  has  affirmed  that  the  measure  of  riches  is  com- 
mand of  labor  or  cost  in  labor,  that  the  more  or  less  of 
riches  can  be  discovered  only  by  the  more  or  less  of  the 
labor  commanded  by  the  goods  composing  the  riches.1 

.  It  is  necessary  to  mention  Adam  Smith's  so-called  corn 
measure  of  value.  Ricardo  says,  referring  to  Smith,  that 
"  sometimes  he  speaks  of  corn,  at  other  times  of  labour,  as 
a  standard  measure."  z  The  impression  thus  given  is  erron- 
eous. Corn  is  not  selected  as  a  standard  coordinate  with 
labor,  but  is  merely  singled  out  from  among  commodities 
as  being  a  convenient  practical  index  of  the  real  or  labor 
standard.  The  practical  question  of  corn-rents  was  inter- 
esting and  called  for  some  mention.  Smith  believed  that  a 
given  quantity  of  grain  possessed  more  nearly  a  constant 
value  in  different  times  than  most  commodities,  merely 
because  corn  is  likely  to  remain  from  age  to  age  in  a  steady 
exchange  ratio  with  labor.3 

lln  criticising  the  labor-command  standard  of  Smith,  Ricardo  has 
made  virtually  the  same  point  as  the  above  (pp.  8-14,  Conner  ed.  Ri- 
cardo's  Principles} .  By  riches  Smith  cannot  mean  what  Ricardo  means 
by  this  term  in  his  famous  chapter  on  the  antinomy  of  value.  (Chap. 
xx,  "Value  and  Riches,  their  Distinctive  Properties.")  If  by  reason 
of  scarcity,  wine  should  come  to  command  in  exchange  more  labor  than 
formerly,  Smith  would  have  to  say  that  a  given  quantity  of  wine  be- 
comes more  riches.  This  Ricardo  would  not  say. 

J Principles,  p.  8. 

8  P.  36.  The  following  passage  (  p.  38)  exhibits  perfectly  Smith's  gen- 
eral theory  of  the  relation  of  labor,  the  precious  metals,  and  grain  to 
value  as  a  dynamic  problem.  "  Labour,  therefore,  it  appears  evidently,  is 
the  only  universal  as  well  as  the  only  accurate  measure  of  value,  or  the 
only  standard  by  which  we  can  compare  the  values  of  different  commo- 
dities at  all  times  and  at  all  places.  We  cannot  estimate,  it  is  allowed, 
the  real  value  of  different  commodities  from  century  to  century  by  the 
quantities  of  silver  which  were  given  for  them.  We  cannot  estimate  it 


2g  LABOR  THEORY  OF  VALUE  [2g6 

from  year  to  year  by  the  quantities  of  corn.  By  the  quantities  of  labour 
we  can,  with  the  greatest  accuracy,  estimate  it  both  from  century  to  cen- 
tury and  from  year  to  year.  From  century  to  century  corn  is  a  better 
measure  than  silver,  because  from  century  to  century  equal  quantities  of 
corn  will  command  the  same  quantity  of  labour  more  nearly  than  equal 
quantities  of  silver.  From  year  to  year,  on  the  contrary,  silver  is  a  bet- 
ter measure  than  corn,  because  equal  quantities  of  it  will  more  nearly 
command  the  same  quantity  of  labour." 


CHAPTER  III 

THE    EMPIRICAL    ACCOUNT    OF    ADAM    SMITH. 

I.  IN  the  splendid  chapters  on  the  "  Component  Parts  of 
Price,"  and  the  "  Natural  and  Market  Price  of  Commodi- 
ties," Adam  Smith  flees  the  more  speculative  questions  of 
the  philosophical  essence  of  value,  and  turns  to  that  most 
important,  but  relatively  proximate,  principle  of  exchange 
value  in  the  modern  market,  which  we  now  call  the  law  of 
entrepreneur's  costs.  It  is  beyond  the  scope  of  this  history 
to  follow  him  through  his  analysis  of  the  component  parts 
of  this  cost,  called  by  him  the  "  component  parts  of  price," 
into  wages,  profits  and  rent.  The  "  natural  "  or  "  neces- 
sary price "  is  the  sum  of  these  components,  and  is  the 
center  toward  which  actual  market-price  is  always  tending. 
With  Cairnes,  we  now  call  this  by  the  better  term,  "  normal 
market  value."  Nor  can  we  trace  the  thought  into  the  sub- 
sequent separate  chapters  on  "  Wages,"  "  Profits,"  and 
"  Rent  of  Land,"  where  Adam  Smith  presents  what  is  prob- 
ably the  earliest  attempt  at  a  systematic  theory  of  distribu- 
tion. 

We  are  concerned  only  with  the  fact  that  in  the  "  empir- 
ical account  "  Adam  Smith  shifts  his  ground  on  the  ques- 
tion of  the  relation  of  labor  to  value.  While  dwelling 
upon  the  hypothetical  primitive  conditions  under  which  the 
essence  of  value  is  supposed  to  be  laid  bare,  he  proposed  the 
labor-cost  and  the  labor-command  standards  without  a  word 
as  to  their  mutual  relations.  But  as  he  approaches  the  prob- 
lem of  value  under  advanced  conditions,  he  both  explains  his 
287]  29 


30  LABOR  THEORY  OF  VALUE  [2g8 

view  of  the  relation  of  these  two  standards,  and  abandons 
the  first  one,  that  of  labor  cost.  In  the  primitive  state  of 
society,  the  labor  cost  of  a  commodity  determines  the 
amount  of  labor  commanded  by  it  in  exchange.  The  two 
amounts  of  labor  must  "  naturally "  be  the  same.  The 
"whole  produce  of  labour,"  then,  belongs  to  the  laborer,  and 
no  profits  or  rent  exist  to  destroy  the  proportionality  be- 
tween labor-cost  and  value.  But  in  society  as  now  consti- 
tuted, it  is  different. 

"  The  whole  produce  of  labour  does  not  always  belong  to  the 
labourer.  He  must  in  most  cases  share  it  with  the  owner  of 
the  stock  which  employs  him.  Neither  is  the  quantity  of  labour 
commonly  employed  in  acquiring  or  producing  any  commodity 
the  only  circumstance  which  can  regulate  the  quantity  which  it 
ought  commonly  to  purchase,  command,  or  exchange  for.  An 
additional  quantity,  it  is  evident,  must  be  due  for  the  profits  of 
stock,"  (and  the  rent  of  land.)  1 

2.  In  a  word,  value  in  exchange  is  no  longer  proportion- 
ate to  labor-cost,  because  the  value  of  a  commodity  must 
now  contain  elements  which  remunerate  not  only  the  labor, 
but  also  the  capital  and  land  employed  in  its  production. 
Nevertheless,  the  "  real  value  "  of  such  a  commodity  pro- 
duced in  advanced  society  is  measured  by  the  labor  which 
that  commodity  will  command  in  exchange. 

"  The  real  value  of  all  the  different  component  parts  of  price, 
it  must  be  observed,  is  measured  by  the  quantity  of  labour, 
which  they  can,  each  of  them,  purchase  or  command.  Labour 
measures  the  value  not  only  of  that  part  of  price  which  resolves 
itself  into  labour,  but  of  that  which  resolves  itself  into  rent, 
and  of  that  which  resolves  itself  into  profits."  z 

'P.  52.  *  'P.  52. 


289]          EMPIRICAL  ACCOUNT  OF  ADAM  SMITH  $i 

The  inaccuracy  of  expression  in  this  passage  is  gross. 
Without  scrutiny  of  the  context  one  would  certainly  fail  to 
get  an  idea  from  the  astonishing  words  that  "labour  meas- 
ures the  value  of  that  part  of  price  which  resolves  itself  into 
labour."  In  the  first  place,  for  the  last  word  "  labour," 
wages  should  be  substituted.  Labor  is  neither  a  share  in 
distribution  nor  a  "  component  part  of  price."  The  mean- 
ing of  the  passage  is  that  the  "  real  value  "  of  a  commodity, 
even  in  advanced  society,  is  measured  by  the  amount  of 
labor  which  can  be  had  in  exchange  for  it,  in  spite  of  the 
fact  that  its  value  in  exchange  is  no  longer  in  proportion  to 
its  cost  of  production  in  labor.  In  the  above  citation,  Adam 
Smith  means  to  assert  that  the  "  real  value  "  of  any  con- 
crete income  as  a  share  in  distribution  is  measured  by  the 
amount  of  labor  it  will  command.  Thus  the  "  real  value  " 
of  the  rent  of  a  plot  of  ground  would  vary  through  time, 
according  to  the  number  of  days  of  labor  that  could  be  pur- 
chased by  it  in  the  different  years.  As  a  theory  of  value  to 
apply  to  actual  life,  Adam  Smith  left  us  an  early  form  of 
the  law  of  entrepreneur's  cost  and  a  labor-command  meas- 
ure of  value.  But  he  disowns  what  is  naturally  thought  of 
as  the  genuine  classical  labor  theory  of  value,  that  labor-cost 
regulates  market-value.  This  theory  was  Ricardo's,  and 
really  his  alone.1 

1  McCulloch  and  James  Mill  were  but  satellites  of  Ricardo. 


CHAPTER  IV 

CRITICISM    OF    THE   THEORIES  .OF   ADAM    SMITH. 

i.  IN  this  chapter  it  is  the  intention  to  examine  more 
fully  the  reasoning  by  which  Adam  Smith  sought  to  estab- 
lish his  main  contentions  concerning  the  relation  of  labor  to 
value.  As  for  a  proof  that,  under  "  philosophical "  primi- 
tive conditions,  goods  would  exchange  in  proportion  to  their 
costs  in  labor,  none  is  given.  It  is  considered  obvious  that 
this  would  be  true: 

"  It  is  natural  that  what  is  usually  the  produce  of  two  days' 
or  two  hours'  labour,  should  be  worth  double  of  what  is  usually 
the  produce  of  one  day's  or  one  hour's  labour."  * 

In  support  of  the  theorem  of  the  labor-command  standard, 
however,  in  contrast  with  that  of  labor-cost,  he  makes  a 
show  of  argument,  which  is  contained  in  the  following 
quotation : 

"  Every  man  is  rich  or  poor  according  to  the  degree  in  which 
he  can  afford  to  enjoy  the  necessaries,  conveniences,  and  amuse- 
ments of  human  life.  But  after  the  division  of  labour  has  once 
thoroughly  taken  place,  it  is  but  a  very  small  part  of  those  with 

1  P.  49.  Torrens,  in  his  Essay  on  the  Production  of  Wealth,  has 
worked  out  with  great  pains  a  form  of  proof  of  this  proposition.  It  is 
exhibited  in  a  series  of  dialogues  between  primitive  producers  to  show 
that  an  exchange  of  goods  at  a  ratio  out  of  proportion  to  labor-costs  is 
incompatible  with  recognized  motives  of  trade.  His  proof  is  good 
enough  under  the  tacit  assumptions  which  he  makes,  including  all  the 
conditions  of  the  perfect  type  of  fictitious  primitive  society  used  by  class- 
ical writers. 

32  [290 


29 1  ]       CRITICISM  OF  THEORIES  OF  ADAM  SMITH  33 

which  a  man's  own  labour  can  supply  him.  The  far  greater 
part  of  them  he  must  derive  from  the  labour  of  other  people, 
and  he  must  be  rich  or  poor  according  to  the  quantity  of  that 
labour  which  he  can  command,  or  which  he  can  afford  to 
purchase.  The  value  of  any  commodity,  therefore,  to  the  per- 
son who  possesses  it,  and  who  means  not  to  use  or  consume 
it  himself,  but  to  exchange  it  for  other  commodities,  is  equal 
to  the  quantity  of  labour  which  it  enables  him  to  purchase  or 
command.  Labour,  therefore,  is  the  real  measure  of  the  ex- 
changeable value  of  all  commodities."  * 

This  passage  permits  of  but  one  interpretation.  If  I  am 
rich,  in  the  sense  of  owning  things  with  a  money  price  or 
exchange  value,  in  proportion  to  the  quantity  of  labor  which, 
by  means  of  these  things,  I  can  purchase  or  command, 
quantity  of  labor  here  can  mean  but  one  thing,  namely, 
quantity  of  productive  power  as  opposed  to  quantity  of  toil, 
pain,  subjective  sacrifice,  or  disutility.  In  society,  I  am 
supplied  with  this  world's  goods  virtually  in  proportion  to 
the  amount  of  productive  power  of  labor  at  my  call;  and 
this  amount  is  asserted  to  be  the  true  measure  of  value. 
This  we  may  describe  as  a  view  of  labor  as  potential  com- 
modity. Labor  to  be  performed  is  commodity  in  the  mak- 
ing. What  kind  of  commodity  it  shall  be  in  the  particular 
case  depends  upon  the  will  of  him  who  has  command  over 
the  labor.  A  later  sentence  bears  out  this  explanation  per- 
fectly : 

"[A  person's]  fortune  is  greater  or  less  precisely  in  propor- 
tion to  the  extent  of  this  power  [over  labor]  ;  or  to  the  quantity 
either  of  other  men's  labour,  or,  what  is  the  same  thing,  of 
the  produce  of  other  men's  labour,  which  it  enables  him  to  pur- 
chase or  command.  The  exchangeable  value  of  everything 
must  always  be  precisely  equal  to  the  extent  of  this  power  which 
it  conveys  to  its  owner."  2 

1  P.  30.  J  P.  32. 


34  LABOR  THEORY  OF  VALUE          [2Q2 

This  signifies,  then,  that  the  value  of  any  article  to  its  pos- 
sessor must  be  measured  by  the  amount  of  labor  which  it 
can  command  in  exchange,  because  this  labor  is  the  means 
of  obtaining  valuable  articles  in  general.  To  Smith,  labor 
is  the  great  homogeneous,  undifferentiated,  common  de- 
nominator to  the  wonderfully  diverse  mass  of  goods  which 
come  into  existence  out  of  it,  and  the  value  or  "  real 
worth  "  *  of  each  of  these  goods  follows  the  quantity  of  the 
source-stuff  turned  to  its  production. 

2.  The  law  of  supply  and  demand  and  the  law  of  entre- 
preneur's cost  are  proximate  empirical  principles  which, 
although  possibly  of  much  more  practical  importance  than 
a  philosophy  of  value,  do  not  give  an  ultimate  explanation 
of  the  riddle  of  this  phenomenon.  Adam  Smith's  theory  of 
labor  as  "  potential  commodity  "  is  an  attempt  to  give  an 
ultimate  explanation,  but  as  such  it  should  be  judged  a  fail- 
ure, for  it  really  avoids  the  question  of  ultimate  explana- 
tion. It  begins :  "  Every  man  is  rich  or  poor  according  to 
the  degree  in  which  he  can  afford  to  enjoy  the  necessaries, 
conveniences,  and  amusements  of  human  life."  Air  is  a 
necessity  to  human  life,  but  a  man  is  not  rich  in  proportion 
to  the  quantity  of  air  he  can  command.  The  object  of  this 
statement  is  not  to  make  a  carping  criticism  of  Smith,  but 
only  to  point  out  that  by  "  necessaries,  conveniences  and 
amusements  "  he  means  here  solely  such  of  these  things  as 
have  economic  value.  Since  he  has  already  passed  judg- 
ment that  the  economic  quantity  of  these  things  is  com- 
pletely independent  of  the  quantity  of  their  utility,  he  sees 
no  way  of  measuring  these  things,  as  economic  quantities, 
except  by  looking  to  their  origin  in  a  measurable  and,  as  he 

lWhen  Smith  speaks  of  "  exchangeable  value  "  as  being  measured  by 
power  to  command  labor,  he  is  using  the  only  term  he  has  to  stand  for 
any  or  every  concept  of  value  distinct  from  the  "  value  in  use"  or  gen- 
eral utility  of  free  goods. 


293  ]       CRITICISM  OF  THEORIES  OF  ADAM  SMITH  35 

believes,  homogeneous  something  called  labor.  In  criticism 
of  this  we  have  but  to  note  that  if  the  only  means,  or  the 
first  means,  of  determining  the  economic  quantity  of  a 
physical  complex  of  goods  were  by  measurement  of  the  labor 
turned  to  its  making,  the  economic  system  of  things  would 
be  turned  upside  down.  If  the  value  of  the  articles  pro- 
duced for  me  by  that  part  of  the  labor  of  society  over  which 
I  have  command,  can  be  determined  solely  by  reference  to 
the  quantity  of  this  labor,  I  am  left  without  the  slightest 
guidance  for  the  application  of  this  labor  under  my  direc- 
tion. The  truth  is,  the  command  or  direction  of  labor 
necessarily  implies  the  ability  to  estimate  values  independ- 
ently of  the  quantity  of  labor  employed  in  the  production  of 
them,  previously  to  its  employment.  Value  is  the  guiding- 
star  to  labor.  How  can  the  point  of  attack  of  labor  against 
the  physical  environment  be  selected  unless  the  results  to  be 
expected  in  different  cases  can  be  compared  in  value,  inde- 
pendently of  the  quantity  of  the  labor?  If  the  quantity  of 
labor  determined  the  value,  it  would  make  no  difference 
where  the  labor  was  turned;  the  value  of  the  result  would 
always  be  the  same.  Turned  in  an  indefinite  number  of 
directions,  labor  will  produce  no  value  whatsoever;  turned 
in  certain  directions  it  will  bring  forth  the  maximum  value 
of  which  it  is  capable.  It  is  one  of  the  main  functions  of 
the  entrepreneur  in  modern  economic  society  to  turn  labor- 
power  in  the  directions  of  maximum  value  return.  All 
these  things  are  perfectly  obvious,  yet  value  theorists  un- 
counted have  ignored  them.  Quantity  of  labor-cost,  even 
when  conceived  of  as  being  an  entity  of  superior  homo- 
geneity to  quantity  of  satisfaction,  cannot  be  the  first  or 
fundamental  means  of  measuring  value. 

The  view  that  cost  is  the  essence  of  value  is  thus  ob- 
viously irrational,  and  no  escape  from  this  difficulty  i» 
afforded  by  the  concession  made  explicitly  by  Ricardo,  and 


36  LABOR  THEORY  OF  VALUE          [294 

after  him  by  Marx,  that  utility  is  a  condition  prerequisite 
to  value.  The  problem  of  directing  labor  in  production  is 
a  question  of  how  much  labor  can  be  economically  employed 
in  making  such  and  such  a  useful  thing.  In  the  theories  of 
Ricardo  and  Marx,  the  quantity  of  value  is  held  to  have  no 
relation  to  the  quantity  of  utility,  but  to  be  determined  by 
the  quantity  of  cost.  There  must  be  a  quantity  of  utility 
to  which  the  quantity  of  productive  power  destroyed  in  its 
obtainment  is  adjusted.  Utility  properly  conceived,  there 
is  such  a  quantity,  and  value  is  its  measure. 

3.  In  the  first  general  argument  for  the  labor-command 
standard,  Adam  Smith  seems  to  regard  labor  solely  in  the 
aspect  of  productive  power;  but,  as  the  reader  will  recall, 
we  do  not  advance  far  in  his  many-sided  discussion  before 
we  encounter  labor  as  disutility.  Labor  is  later  said  to  be 
an  "  invariable  measure,"  because  it  stands  for  a  constant 
amount  of  hardship.  Beyond  a  doubt,  disutility  is  asso- 
ciated with  value  (as  " Bedcutwig ")  in  some  very  intimate 
relation.1  This  is,  at  bottom,  the  explanation  of  the  re- 
markable vitality  of  the  labor  theory,  even  in  forms  that 
are  absurdly  incorrect. 

If  it  is  my  labor  which  is  commanded  in  exchange  by  a 
given  commodity,  the  personal  value  to  me  of  this  commod- 
ity for  which  I  have  given  my  labor  might  well  be  carried 
in  my  mind  in  terms  of  the  disutility  it  cost  me.  So,  in  a 
general  way,  if  the  amount  of  some  kind  of  commodity 
which  can  be  bought  by  a  day's  wages  (i.  e.,  which  "  com- 
mands "  a  day's  labor)  alters,  the  significance  of  this  com- 
modity to  wage-earners  in  general  will  alter.  Some  per- 
sons might  conceive  the  change  in  significance  chiefly  in 

1  Its  relation  to  pure  objective  exchange-value  is  another  question.  In 
Chapter  xi  of  this  essay  will  be  found  a  summary  discussion  of  the  rela- 
tion of  disutility  cost  to  value. 


295]       CRITICISM  OF  THEORIES  OF  ADAM  SMITH  37 

terms  of  altered  disutility  cost.  This  fact  is  probably  con- 
sidered by  statisticians  when  they  investigate  questions  of 
real  wages,  or  changes  in  family  budgets.  But  Adam 
Smith's  proposition  that  labor  commanded  in  exchange  is 
a  precise  and  invariable  measure  of  "  excJiangeable  value" 
is  not  a  good  form  of  stating  so  mild  a  principle. 

Further  discussion  of  this  subject  must  be  attended  by 
extreme  difficulties.  For  in  endeavoring  to  ascertain  what 
Smith  meant,  or  "  ought  to  have  meant,"  we  encounter  the 
difficulties  due  to  the  laxness  and  paucity  of  Smith's  expla- 
nations superposed  on  the  difficulties  inherent  in  this  in- 
tricate subject.  His  various  expressions  suggest  that  his 
labor  theory  of  value  means  more  than  the  thought  that  the 
disutility  of  each  person's  labor  may  measure  the  "  sub- 
jective "  value  to  that  person  of  commodities  obtained  by 
him  in  exchange  for  his  own  labor.1  Smith  speaks  of  labor 
as  the  "  real  measure  of  exchangeable  value."  The  ex- 
change-value of  a  commodity  in  a  given  market  is  the  same, 
whoever  its  owner  may  be  and  whatever  may  be  his  needs, 
or  the  relation  of  this  commodity  to  his  particular  needs. 
This  relation  may  give  it  value  to  him;  but  we  would  never 
speak  of  the  commodity's  exchange-  value  to  him.  This  in- 
dependence of  market-value  from  the  particular  needs  of 
the  particular  owner  is  one  of  the  things  desired  to  be  con- 
veyed by  the  Austrian  economists  in  their  term,  "objective 
exchange-  value."  Now  Smith  fails  to  distinguish  between 
the  "real  worth"  of  goods  and  their  "exchangeable  value." 
There  can  be  no  doubt  that  he  would  be  quite  willing 
to  speak  of  the  "  real  exchangeable  value  "  of  a  good 
as  being  that  which  is  measured  by  labor.2  Thus,  I  be- 


thought  in  the  "  final  disutility  "  theories  of  Gossen,  Jevons  and 
Clark,  independently  worked  out  by  these  writers. 

'These  very  words  were  later  used  by  Malthus  in  his  defense  of  the 
labor-command  standard. 


3g  LABOR  THEORY  OF  VALUE          [296 

lieve,  Smith  conceives  of  a  "  real  worth "  independent 
of  worth  to  any  particular  person.  This  "  real  worth  " 
in  a  good  is  measurable  by  the  labor  commanded  in  ex- 
change for  the  good,  because,  as  he  first  suggests,  labor, 
as  productive  power,  is  the  homogeneous  source-stuff  of 
commodities.  But  secondly,  the  suggestion  enters  that 
a  unit  of  labor  is  also  a  unit  of  disutility,  a  unit  assumed 
to  have  an  independent  and  invariable  significance.  This 
kind  of  real  worth  and  such  a  unit  of  disutility  are 
compounded  abstractions.  No  one  can  hold  it  against  a 
concept,  except  in  the  infancy  of  thought,  that  it  is  an  ab- 
straction, but,  after  my  best  effort,  I  for  one  cannot  see  that 
these  concepts  are  meaningful  abstractions. 

If  we  grant  this  conception  of  "  real  worth,"  and  the 
conception  of  a  unit  of  disutility  in  general,  distinguishable 
in  the  different  labors  of  different  persons,  we  still  find  diffi- 
culties ahead.  The  same  commodity  may  exchange  for  two 
days  of  common  labor  or  one  day  of  skilled  labor.  Either 
of  these  is  the  quantity  of  labor  commanded  in  exchange. 
According  to  Smith's  conception,  either  must  measure  its 
"  real  value."  Now  the  fact  is,  one  day  of  skilled  labor 
ordinarily  involves  less  disutility  than  two  days  of  common 
labor.1  Competitive  wages  are  paid  in  proportion  to  effi- 
ciency, not  in  proportion  to  disutility.  A  given  piece  of 
labor  will  count  as  a  great  or  small  quantity  when  com- 
manded in  exchange  in  proportion  to  the  wages  paid  for  it. 
It  is  then  a  difficulty  with  Smith's  labor-command  standard 

1  In  this  sentence  we  do  not  assume  the  commensurability  of  disutilities 
incurred  by  different  persons,  but  the  commensurability  of  the  disutilities 
incident  to  different  occupations.  Thus  we  should  all  be  willing  to  say 
that  the  steamship  stoker's  position  means  harder  labor  than  that  of  the 
chief  steward  of  the  dining  room,  but  we  may  be  supposed  to  judge  this 
by  conjparing  our  own  (imagined)  labor  as  a  stoker  with  our  own  labor 
as  steward. 


297]       CRITICISM  OF  THEORIES  OF  ADAM  SMITH  39 

that  he  implies  that  labor  derives  its  capacity  to  serve  as  a 
measure  of  real  value  from  its  disutility,  while  the  same 
commodity  will  command  different  disutilities  in  different 
exchanges.  The  attempt  to  reduce  skill  to  disutility  by 
urging  that  the  higher  wages  of  skill  are  in  proportion  to 
the  disutility  of  acquiring  the  skill  is  futile.  The  tendency 
of  the  wages  of  skilled  labor  to  proportion  themselves  to 
the  comparative  disutility  of  that  labor — i.  e.,  to  the  sum  of 
the  disutility  daily  felt  plus  some  share  or  other  of  the  past 
disutility  cost  of  acquiring  the  skill — is  so  completely  sub- 
merged beneath  other  forces  that  it  is  negligible.  In  addi- 
tion to  this,  much  skill  is  not  acquired,  but  is  inborn  with- 
out having  entailed  any  disutility  cost  of  acquisition  to  its 
possessor. 

To  conclude  with  this  question,  so  far  as  Adam  Smith 
means  to  suggest  that  the  economic  worth  of  a  good  to  a 
given  person  can  be  measured  by  him  in  terms  of  its  dis- 
utility cost  to  him,  the  position  and  some  of  its  consequences 
mentioned  above  are  well  taken.  Smith's  theory,  how- 
ever, failed  to  penetrate  the  problem  as  do  later  theories 
of  the  final  equivalence  of  utility  and  disutility.  But  the 
implications  of  his  arguments  further  than  this  seem  incap- 
able of  defense. 

4.  Adam  Smith  states  that  since  under  the  division  of 
labor  any  man  must  derive  almost  all  his  necessaries,  con- 
veniences and  luxuries  from  the  labor  of  other  people,  he 
must  be  rich,  in  the  sense  of  possessing  things  of  value, 
in  proportion  to  the  quantity  of  this  labor  which  he  can 
command.  The  assumption  implicit  in  this  is  that  the  quan- 
tity of  labor  expended  upon  the  production  of  things  for 
this  man,  as  labor-cost,  determines  their  values.  For  if  the 
economic  goods  obtained  by  him  from  the  labor  of  others, 
which  he  is  enabled  to  command,  should  have  values  out  of 
proportion  to  the  quantity  of  labor  so  commanded,  namely, 


40  LABOR  THEORY  OF  VALUE  [298 

their  labor-cost,  this  man  would  not  be  rich  or  poor  merely 
in  proportion  to  the  labor  which  he  commands.  Since, 
therefore,  the  labor-command  standard  of  value  is  made  to 
depend  upon  labor-cost  regulation  of  value,  according  to  the 
principal  argument  advanced  by  Smith,  it  follows  that  Smith 
is  really  estopped  from  applying  the  labor-command  stand- 
ard as  he  does  under  the  conditions  of  advanced  society. 
For  he  himself  has  stated  that  labor-cost  regulation  of  value 
fails  under  these  conditions. 

Adam  Smith's  empirical  account  of  value  by  no  means 
made  future  improvement  of  statement  impossible,  but  it 
was  an  excellent  theory  of  proximate  principles.  His  philo- 
sophical account  was  an  unsystematic  body  of  suggestions, 
so  filled  with  difficulties  that  it  is  doubtful  if  the  present 
writer  has  been  able  to  keep  his  interpretation  and  criticism 
of  this  account  free  from  fallacy.  The  carrying  over  of  the 
labor-command  standard  of  value  from  the  philosophical  to 
the  empirical  account  seems  only  to  introduce  an  impurity 
into  the  latter. 


CHAPTER  V 

RICARDO    AND    THE    TRUE    CLASSICAL    LABOR    THEORY 

I.  IT  is  not  incumbent  upon  the  historian  of  a  single 
doctrine  to  pass  judgment  upon  the  question  of  the  proper 
position  of  Ricardo  as  a  general  economist,  compared  with 
Smith  and  Malthus.  But  since,  in  the  following  chapter, 
we  shall  be  led  to  find  much  fault  with  Ricardo's  method  of 
exposition  of  the  theory  of  value,  it  is  necessary  to  state  at 
the  outset  that  Ricardo's  writings  on  value  possess  the  dis- 
tinctive merit,  in  contrast  with  those  of  Smith  and  Malthus, 
that  they  can  be  reduced  to  a  whole,  essentially  self-consistent 
in  its  large  lines.  Self-consistency  is  not  the  sole  test  of 
truth,  and  this  praise  does  not  signify  that  Ricardo's  is  a 
correct  theory,  but  the  longer  one  studies  Ricardo  the  more 
satisfactory  does  his  text  become,  up  to  the  point  where  one 
believes  he  has  obtained  a  complete  understanding  of  it. 
On  the  other  hand,  it  is  a  task  of  supreme  difficulty  to  read 
Ricardo  critically.  His  inconsistencies  in  the  use  of  terms 
are  most  trying.  It  is  remarkable  that  the  final  result  of 
his  reasoning  was  on  the  whole  self-consistent.  The  com- 
mentator is  inclined  to  quote  Senior  with  approval  when  he 
remarked  that  Mr.  Ricardo  "  is  perhaps  the  most  incorrect 
writer  [i.  e.,  in  the  use  of  terms]  who  ever  attained  philo- 
sophical eminence."  1  The  point  of  greatest  weight  in  the 
labor  theory  of  value,  after  the  vestibule  of  the  subject  has 
been  passed  through,  is  treated  with  a  maladroitness  which 

1  Political  Economy,  p.  115. 
299]  4i 


42  LABOR  THEORY  OF  VALUE  [300 

has  made  a  matter  that  is  not  over-difficult  in  itself  very 
hard  to  understand.  This  is  the  theme  of  sections  IV  and  V 
of  the  chapter  on  value,  and  is,  indeed,  in  another  guise, 
the  difficulty  arising  out  of  the  "  organic  composition  of 
capital,"  which,  under  this  name,  becomes  the  main  point 
of  theoretical  interest  in  the  third  volume  of  Marx's  Das 
Kapital. 

There  is  abundant  evidence  that  Ricardo  himself  consid- 
ered the  theory  of  value  to  be  a  very  hard  problem,  and 
furthermore  that  he  was  not  completely  satisfied  with  his 
own  treatment  of  it.  As  late  as  1823,  he  wrote  to  Mc- 
Culloch : 

"  The  difficult  subject  of  value  has  engaged  my  thoughts,  but 
without  my  being  able  satisfactorily  to  find  my  way  out  of  the 
labyrinth."  1 

Earlier  he  wrote  to  the  same  disciple: 

"  I  am  not  satisfied  with  the  explanation  I  have  given  of  the 
principles  which  regulate  value."  2 

Some  things  have  a  value  which  is  obviously  not  regulated 
by  labor  cost.  Concerning  these,  Ricardo  wrote: 

"  I  cannot  get  over  the  difficulty  of  the  wine  which  is  kept 
in  the  cellar  for  three  or  four  years  [i.  e.,  while  constantly  in- 
creasing in  exchange  value],  or  that  of  the  oak  tree,  which 
perhaps  originally  had  not  2  s.  expended  on  it  in  the  way  of 
labour,  and  yet  comes  to  be  worth  £  100."  3 

2.  The  writer  of  the  present  essay  has  already  acknowl- 

1  Letters  of  Ricardo  to  McCulloch,  p.  153. 
*Ibid.,  p.  132. 

1 Letters  to  McCulloch,  p.  153.  This  shows  that  Ricardo  was  not  sat- 
isfied in  principle  with  his  treatment  of  the  value  of  scarcity  goods. 


RICARDO  AND  TRUE  CLASSICAL  THEORY  43 

edged  his  indebtedness  to  Professor  von  Wieser  for  sugges- 
tion of  the  means  of  interpreting  the  main  lines  of  the 
history  of  the  labor  theory.  Professor  von  Wieser's  terse 
judgment  of  Ricardo's  writings  on  value  is  contained  in  the 
followin  sentences  : 


"  What,  then,  did  Ricardo  attempt  ?  His  whole  endeavor  ex- 
hausted itself  in  trying  to  show  that  the  philosophical  and  the 
empirical  theories  of  Adam  Smith  —  both  of  which,  indeed,  in 
taking  up  this  position  he  had  to  clear  and  carry  further  —  did 
not  contradict  each  other  so  much  as  at  first  sight  would 
appear."  x 

The  manner  of  putting  this  is  objectionable,  in  that  it  im- 
plies, I  believe,  an  improper  subordination  of  Ricardo's 
theory  to  that  of  Smith.  While  Ricardo  quotes  Smith 
freely,  his  exposition  of  the  subject  of  value  is  in  no  sense 
a  summary  and  criticism  of  Smith's  views.  On  the  con- 
trary, he  writes  with  a  remarkably  independent  spirit.  It 
is,  nevertheless,  true  that  the  principal  part  of  the  reasoning 
of  Ricardo  is  concerned  with  the  adaptation  of  the  empir- 
ical account  of  value  to  the  philosophical,  that  is,  to  the 
philosophical  account  as  he  understands  it.  These  two  ac- 
counts are  almost  inextricably  entangled  in  Ricardo's  work, 
but  their  disentanglement  is  the  sole  method  of  exhibiting 
the  ultimate  purport  of  his  reasonings.  For,  in  essence,  his 
theory  is  as  follows  :  The  value  of  those  things  whose  value 
is  subject  to  an  ascertainable  principle  depends  on  their  cost 
of  production  in  human  labor.  (The  value  of  pure  scarcity 
goods  which  cannot  be  increased  in  quantity  by  the  applica- 
tion of  common  human  labor  simply  "  varies  with  the  vary- 
ing wealth  and  inclinations  of  those  who  are  desirous  to 
possess  them."  If  subject  to  no  law  of  value,  these  goods 

1  Natural  Value,  Author's  Preface,  p.  xxviii. 
*  Principles,  Conner  ed.,  p.  6. 


44  LABOR  THEORY  OF  VALUE  [302 

are  also,  in  Ricardo's  view,  unimportant.)  Labor  cost  is 
the  kernel  of  value,  so  far  as  it  seems  to  have  a  kernel. 
This  is  the  philosophical  account.  Smith's  labor-command 
measure  is  condemned  at  the  outset.  There  is  little  doubt 
that  labor  is  here  conceived  as  disutility,  though  Ricardo 
does  not  pause  to  discuss  the  concept  of  labor.  But 
Ricardo's  theory  ends  as  an  empirical  doctrine,  in  which 
labor-cost  figures  as  the  regulator  of  exchange  value  only 
because  it  is  conceived  to  be  the  all-important  element  which 
governs  the  amount  of  entrepreneur's  expenses  of  produc- 
tion. Smith  abandoned  the  labor-cost  regulator  for  real 
society  because  he  observed  that  the  "  necessary  price  "  of 
a  market  commodity,  or  the  price  determined  by  its  entre- 
preneur's cost  of  production,  must  cover  payments  for  rent 
of  land  and  interest  on  capital  as  well  as  wages  of  labor. 
Not  so  Ricardo.  He  holds  fast  to  the  labor-cost  standard, 
upon  the  belief  that  rent  does  not  "  enter  into  "  this  neces- 
sary price,  and  that  the  taking  of  interest  causes  only  a 
negligible  variation  of  money  cost  from  proportionality  with 
labor  cost.  The  discussion  of  this  variation  is  the  most 
involved  part  of  his  writings.  The  end  is  an  imperfect 
reconciliation  between  the  empirical  and  philosophical  ac- 
counts. 

3.  The  simpler  and  more  familiar  parts  of  Ricardo's 
theory  may  be  considered  first.  His  doctrine,  it  should  be 
observed,  is  by  no  means  absolute  or  unconditional. 

( i )  Utility  is  a  condition  essential  to  value,  but  no  more. 
The  quantitative  discrepancy  between  utility  and  exchange 
value  seems  as  obvious  to  Ricardo  as  to  Smith.  In  a  letter 
to  Say  he  expressed  his  whole  theory  with  respect  to  utility 
even  a  little  more  concisely  than  in  the  Principles: 

"  The  utility  of  things  is  incontestibly  the  foundation  of  their 
value,  but  the  degree  of  their  utility  cannot  be  the  measure 


303]        RICARDO  AND  TRUE  CLASSICAL  THEORY  45 

of  their  value."  "  The  difficulty  of  [a  thing's]  production  is 
the  sole  measure  of  its  value."  l 

When  arguing  against  Smith's  corn-measure  in  Chapter 
XXVIII  (Conner  ed.),  our  author  exclaims:  "What  can 
value  have  to  do  with  the  power  of  feeding  and  clothing?" 
as  if  the  instantaneous  answer  should  be,  "  Nothing  what- 
ever." This  curious  slip  is  mentioned  only  to  show  how 
far  utility  was  removed  from  value  in  Ricardo's  habitual 
thought. 

(2)  "  Possessing  utility,  commodities  derive  their  ex- 
changeable value  from  two  sources :  from  their  scarcity, 
and  from  the  quantity  of  labour  required  to  obtain  them."  * 
This  proposition  has  occasioned  the  claim  of  the  "  Aus- 
trian "  writers  that  the  Ricardian  theory  of  value  is  "  dual- 
istic."  Not  all  economists  have  acquiesced  in  this  criticism, 
for  there  are  those  who  hold  the  labor-cost  and  utility  theo- 
ries to  be  but  two  parts  of  one  larger,  consistent,  whole. 
Among  these  latter  economists,  one  of  the  most  uncompro- 
mising in  his  attitude  is  Professor  Heinrich  Dietzel,  of 
Bonn,  who  asserts  that  Ricardo's  explanation  is  not  dual- 
istic,  because  the  utility  and  cost  views  are  perfectly  recon- 
cilable.3 Still  it  appears  fair  to  say  that,  whether  or  not  some 
later  writer  can  construct  a  theory  which  is  itself  not  dual- 
istic  and  which  is  still  in  inner  harmony  with  what  Ricardo 
meant  to  say,  what  Ricardo  said  was  dualistic.  Textually, 
formally,  his  proposition  is  dualistic,  for  an  intelligent  con- 
temporary reader  would  interpret  his  thought  as  such. 
Commodities  derive  value  from  two  sources,  and  the  law  of 
the  one  kind  has  no  applicability  to  the  other  kind  of  goods. 

'  J.  B.  Say,  Mtlanges  et  Correspondance  d1  Economic  Politique,  Paris, 
1833,  PP-  93-4- 
*  Principles ,  p.  6. 
'Dietzel,  Theoretische  Socialdkonomik,  Leipzig,  1895,  pp.  228-30. 


46  LABOR  THEORY  OF  VALUE          [304 

(3)  The  value  of  scarcity  goods  is  "  wholly  independent 
of  the  quantity  of  labor  originally  necessary  to  produce 
them."     This  is  because  "  no  labor  can  increase  the  supply 
of  such  goods."     These  commodities  are,  however,  an  un- 
important element  in  the  market. 

(4)  The  labor-cost  regulation  of  values  applies  only  to 
goods  in  the  production  of  which  competition  acts  without 
restraint. 

4.  The  doctrine  that,  with  the  foregoing  conditions  un- 
derstood, the  exchange  value  of  commodities  is  governed 
by  the  comparative  quantity  of  labor  required  for  their  pro- 
duction, involves  a  number  of  questions  with  respect  to  the 
manner  of  determining  quantity  of  labor.  Ricardo  did  not 
carry  his  inquiry  into  these  questions  as  far  as  modern  critics 
of  the  labor  theory  have  pressed  theirs,  but  in  the  course  of 
his  writings  he  made  three  important  observations  on  this 
subject. 

(i)  In  the  first  place,  Ricardo  distinguishes  between 
quantity  and  value  of  labor.  J.  B.  Say  had  in  various 
places  endeavored  to  state  Ricardo's  position  as  being  that 
the  value  of  labor  determines  the  value  of  its  products,  for 
in  this  form  the  doctrine  can  easily  be  shown  to  involve  a 
circle.  Ricardo  wrote  to  Say: 

"  You  misrepresent  me  *  *  when  you  say  I  consider  the 
value  of  labour  to  determine  the  value  of  commodities ;  I  hold, 
on  the  contrary,  that  it  is  not  the  value,  but  '  the  comparative 
quantity  of  labour  necessary  to  production  which  regulates  the 
relative  value  of  the  commodities  produced.'  "  * 

The  purport  of  this — though  not  so  explained  by  Ricardo — 
is  that  the  quantity  of  labor  which  an  entrepreneur  is  com- 
pelled by  the  nature  of  a  good  to  employ  to  produce  that 

1  Quoted  in  Letters  of  Ricardo  to  Malthus,  p.  165,  n. 


305]        RICARDO  AND  TRUE  CLASSICAL  THEORY  47 

good,  determines  the  amount  of  wages  he  has  to  pay  for  its 
production.  As  far  as  this  single  point  goes,  the  answer  to 
Say  is  satisfactory. 

(2)  When  Marx  came  to  the  question  of  skilled  labor, 
he  called  it  simply  "  condensed  labor."  It  goes  without 
saying  that  he  judged  the  degree  of  the  condensation  of  any 
concrete  skilled  labor  purely  by  its  comparative  wages,  or 
exchange  value.*  Ricardo's  treatment  of  skilled  labor  is 
even  less  satisfactory  than  Marx's.  He  says: 

"  If  a  day's  labour  of  a  working  jeweller  be  more  valuable 
than  a  day's  labour  of  a  common  labourer,  it  has  long  ago 
been  adjusted,  and  placed  in  its  proper  position  in  the  scale 
of  value."  2 

What  has  long  ago  been  adjusted?  In  definite  words  our 
author  does  not  say,  but  his  meaning  is  ascertainable. 

"  If  a  piece  of  cloth  be  now  of  the  value  of  two  pieces  of 
linen,  and  if,  in  ten  years  hence,  the,  ordinary  value  of  a  piece 
of  cloth  should  be  four  pieces  of  linen,  we  may  safely  conclude, 
that  either  more  labour  is  required  to  make  the  cloth,  or  less  to 
make  the  linen,  or  that  both  causes  have  operated."  3 

If  the  exchange  ratio  of  cloth  to  linen  alters,  the  doc- 
trine is  that  the  cause  must  be  that  some  change  has 
taken  place  in  the  quantity  of  labor  required  to  pro- 
duce cloth  or  linen,  and  not  that  the  "  value "  of  a 
linen-maker's  day  of  labor  has  changed  in  ratio  to  the 
"  value "  of  a  cloth-maker's  day.  In  other  words,  if  ten 

1  For  this  he  is  accused  of  reasoning  in  a  circle.  As  far  as  any  defense 
by  Marx  himself  is  concerned  the  charge  goes  home.  Assuming  the 
productivity  theory  of  wages  (which  is  entirely  inconsistent  with  Marx's 
theory  of  wages)  it  is  quite  permissible  to  say  that  labor  which  has  a 
higher  wage  (or  value)  contains  more  units  of  productive  power,  more 
efficiency  units,  than  that  receiving  a  lower  wage. 

'P.  13.  3P.  14- 


4g  LABOR  THEORY  OF  VALUE         [306 

hours  of  a  cloth-maker's  labor  have  earned  the  same  wages 
(and  thus  occasioned  the  same  cost  to  entrepreneurs)  as 
twelve  hours  of  a  linen-maker's  labor,  "  we  may  safely  con- 
clude "  that  it  is  not  alteration  of  this  ratio  that  causes  alter- 
ation of  the  exchange  ratio  of  cloth  to  linen.  It  is  this  ratio 
between  the  wage-earning  capacity  of  one  kind  of  labor  and 
another  kind  that  "  has  long  ago  been  adjusted."  To  make 
this  point  perfectly  clear,  let  us  quote  again : 

"  The  comparative  degree  of  estimation  [an  equivocal  ex- 
pression which  means  comparative  wage-earning  power]  in 
which  the  different  kinds  of  human  labour  are  held  *  *  *  * 
continues  nearly  the  same  from  one  generation  to  another,  or 
at  least  *  *  the  variation  is  very  inconsiderable  from  year 
to  year,  and  therefore  can  have  little  effect,  for  short  periods, 
on  the  relative  value  of  commodities."  * 

The  question  is  this:  In  the  labor-cost  theory  of  value, 
does  skilled  labor  count  as  more  labor  per  day  than  un- 
skilled, and  if  so  upon  what  principle?  Ricardo's  argu- 
ment, as  just  traced,  avoids  the  question,  and  is  faulty  in 
two  essential  points.  In  the  first  place,  it  is  not  true,  and 
was  not  true  in  Ricardo's  time,  that  the  comparative  skilful- 
ness  of  labor  employed  in  producing  different  commodities 
remains  unchanged.  Machine  invention  alone  produces 
veritable  revolutions  in  this  field.  But  in  the  second  place 
(a  more  important  point  as  a  matter  of  theory),  in  this 
argument  Ricardo  has  shifted  his  ground  with  respect  to 
the  meaning  of  his  labor-cost  law.  This  principle  is  stated 
in  italics  at  the  head  of  his  chapter: 

"  The  value  of  a  commodity,  or  the  quantity  of  any  other 
commodity  for  which  it  will  exchange,  depends  on  the  relative 
quantity  of  labour  which  is  necessary  for  its  production." 

'P.  16. 


307]        RICARDO  AND  TRUE  CLASSICAL  THEORY  49 

This  means  precisely  that,  if  one  A  exchange  for  two  B,  it 
is  because,  at  this  time,  ivithout  reference  to  changes  in  timt; 
it  costs  twice  as  much  labor  to  produce  an  A  as  to  produce 
a  B.  But  now  Ricardo  has  virtually  changed  the  principle 
jo  mganjthat  alterations_jx^  the  exchangg^ratios,  of. 


laborrequiredJXL^Egduce  thgni.  This  is  a  different  prin- 
ciple, and  indeed  one  no  stronger  than  the  other.  We  are 
forced  to  the  conclusion  that  Ricardo  unconsciously  avoided 
the  real  question  in  the  case,  and  failed  to  explain  away  the 
difficulty  of  skilled  labor  in  the  labor  theory. 

(3)  The  quantity  of  labor  required  in  the  production  of 
a  commodity,  which  regulates  its  value,  includes  the  labor 
employed  in  making  the  raw  material,  machinery  and  build- 
ings (capital  goods)  used  up  in  its  production,  as  well  as 
the  labor  directly  applied  to  it.  This  proposition  is  copi- 
ously illustrated  by  examples  drawn  from  primitive  and 
modern  industry,  and  commands  immediate  assent.  It  is 
obvious,  when  once  stated,  that  the  labor  indirectly  applied 
to  the  production  of  a  commodity  is  no  less  required,  if  we 
are  to  obtain  it,  than  that  directly  applied. 

5.  We  have  here  an  important  consideration.  If  the 
labor  directly  applied  to  the  production  of  a  commodity 
were  all  that  is  included  in  its  labor-cost,  the  entrepreneur's 
expenses,  covering  cost  to  him  of  machinery  and  raw 
material,  would  be  too  obviously  out  of  proportion  to  the 
labor  cost  (as  manifested  in  his  wages  cost).  But  it  is 
Ricardo's  intention  to  reduce  the  cost  of  capital  goods  to 
labor  cost.  The  total  labor  cost  of  a  commodity  produced 
from  capital  and  raw  material  is  paid  for  by  a  series  of  en- 
trepreneurs in  their  wages  charges.  Each  entrepreneur 
exacts  a  "  profit "  for  the  time  he  has  advanced  the  wages. 
It  is  in  this  way,  as  Ricardo  sees  it,  that  interest  enters  into 
entrepreneur's  costs.  Does  it  destroy  the  force  of  labor 


50  LABOR  THEORY  OF  VALUE  [-508 

cost  as  a  regulator  of  exchange  value?  To  make  Ricardo's 
answer  to  this  question  clear,  it  is  necessary  to  refer  first  to 
what  he  has  to  say  in  Chapter  IV  of  the  Principles  on  nat- 
ural and  market  price. 

The  term  "  Natural  Price "  has,  it  happens,  a  "  philo- 
sophical "  and  an  "  empirical  "  significance.  It  is  at  best  an 
inexact  pair  of  words.  Its,,  empirical  meaning  is  simply 
normal  value,  the  excellent  term  for  that  value  which,  under 
competition,  constitutes  a  center  of  oscillation  for  market 
values.  Its  "  philosophical  "  meaning,  as  suggested  a  few 
times  by  Smith,  is  the  human  cost  of  obtaining  goods  from 
the  physical  outer  world. 

"  Labour  was  the  first  price,  the  original  purchase-money  that 
was  paid  for  all  things.  It  was  not  by  gold  or  by  silver,  but 
by  labour,  that  all  the  wealth  of  the  world  was  originally 
purchased." 

With  this  sort  of  natural  or  primary  price  Adam  Smith's 
empirical  chapter  on  "  Natural  and  Market  Price "  has 
nothing  to  do.  This  ought  also  to  be  true  of  Ricardo's 
chapter  (Chapter  IV),  because  it  is  a  chapter  explaining- 
how  competition  always  forces  the  market-price  toward  a 
normal  value.1  It  turns  out  in  the  end  that  this  normal 
value  is  a  sum  of  exchange  value  which  is  just  sufficient  to 
cover  the  wages  of  labor  and  the  interest  of  capital  required 
in  production.  This  is  never  made  clear.  Malthus  prob- 
ably never  understood  Ricardo  as  meaning  this.  What  we 
affirm  is,  that  his  text  means  this  when  it  is  altered  or  recti- 
fied so  as  to  give  it  the  self-consistency  which  seems  to  lie 
within  it. 

6.  We  need  now  the  proof  of  this  interpretation.     The 

1  This  explanation  of  the  workings  of  competition  is  beautifully  written 
both  by  Smith  and  Ricardo— is  classic  in  fact. 


309]        RICARDO  AND  TRUE  CLASSICAL  THEORY  51 

opening-  sentence  of  the  chapter  on  natural  and  market  price 
proceeds  as  follows : 

"  In  making  labour  the  foundation  of  the  value  of  com- 
modities, and  the  comparative  quantity  of  labour  which  is 
necessary  to  their  production  the  rule  which  determines  the 
respective  quantities  of  goods  which  shall  be  given  in  exchange 
for  each  other,  we  must  not  be  supposed  to  deny  the  accidental 
and  temporary  deviations  of  the  actual  or  market  price  of 
commodities  from  this,  their  primary  and  natural  price."  x 

This  sentence  seems  to  state  that  the  labor  cost  of  a  com- 
modity is  its  "  natural  price."  If  so,  the  statement  is  due 
to  the  influence  of  the  philosophical  account;  but  it  is  an 
absurdity  in  this  connection.  Actual  market-price  does  not 
deviate  temporarily  from  labor  cost.  Normal  value  is  not 
an  amount  of  labor,  nor  can  it  be  spoken  of  as  equal  to  an 
amount  of  labor.  The  passage  is  a  careless  way  of  saying 
that  the  normal  values  of  goods  are  in  proportion  to  their 
labor  costs.  Ricardo's  real  conception  of  normal  value  is 
this :  The  total  labor  cost  of  a  commodity  determines  the 
total  wages  charges  that  must  be  paid  by  the  entrepreneur, 
or  series  of  entrepreneurs  producing  it.  Competition  tends 
to  give  the  entrepreneurs  producing  different  commodities 
equal  rates  of  "  profits  "  upon  these  outlays.  Therefore 
the  normal  exchange  value  of  a  commodity  is  composed  of 
a  sum  of  wages  costs  (due  to  the  nature  of  the  commodity 
as  requiring  such  and  such  an  amount  of  labor  to  produce 
it),  which  is  the  independent  determining  element,  and  a 
sum  of  interest  which  is  merely  a  uniform  rate  upon  the 
wages  cost.  It  is  in  this  way  that  labor  cost  regulates  value, 
according  to  an  empirical  account.2 

1  P.  65.    The  italics  are  the  present  writer's. 

*"  It  is  necessary  for  me  to  remark  that  I  have  not  said  because  one 


52  LABOR  THEORY  OF  VALUE 

To  substantiate  this  view  of  Ricardo's  meaning,  we  can 
quote  the  following: 

"  Mr.  Malthus  appears  to  think  that  it  is  a  part  of  my  doctrine 
that  the  cost  and  value  of  a  thing  should  be  the  same; — it  is, 
if  he  means  by  cost,  '  cost  of  production  '  including  profits."  * 

The  only  kind  of  cost  that  includes  "  profits  "  (i.  e.,  inter- 
est) is  entrepreneur's  cost. 

7.  We  may  now  turn  our  attention  to  what  is  perhaps 
as  difficult  a  passage  as  was  ever  incorporated  into  a  treatise 
on  economics.  I  refer  to  Sections  IV  and  V  of  Chapter  I 
of  Ricardo's  Principles.  These  sections  treat  of  the  com- 
plication of  interest  in  the  labor  theory  of  value.  *  But  if 
all  Ricardo  claims  in  his  labor  theory  is  that  normal  values 
are  in  proportion  to  labor  costs,  why  is  not  the  explanation 
satisfactory  that  interest  is  merely  a  rate  taken  upon  wages 
costs?  The  difficulty  is  that  in  reality  two  commodities 
may  cost  the  same  amount  of  wages  (because,  as  Ricardo 
has  it,  they  require  the  same  amount  of  labor  for  produc- 
tion) and  yet  cost  very  different  amounts  of  interest.  In 
such  a  case  the  two  commodities  have  the  same  labor  costs 
but  have  different  entrepreneur's  costs,  and  consequently 

commodity  has  so  much  labour  bestowed  upon  it  as  will  cost  £1,000  and 
another  so  much  as  will  cost  ^"2,000  that  therefore  one  would  be  of  the 
value  of  £1,000  and  the  other  of  the  value  of  £2,000,  but  I  have  said 
that  their  value  will  be  to  each  other  as  two  to  one,  and  that  in  those 
proportions  they  will  be  exchanged.  It  is  of  no  importance  to  the 
truth  of  this  doctrine  whether  one  of  these  commodities  sells  for  £1,100 
and  the  other  for  ^"2,200,  or  one  for  ^"1,500  and  the  other  for  ,£"3,000," 
etc.  Conner  ed.,  p.  39. 

1  Principles,  p.  39,  n.  The  same  statement  is  made  in  Letters  to 
Trower,  p.  153. 

*The  difficulty  of  rent  is  escaped  through  the  Ricardian  theory  of  rent. 
The  present  writer  is  persuaded  that  the  classical  theory  of  rent  is  un- 
sound in  this  respect. 


3i  i ]        RICARDO  AND  TRUE  CLASSICAL  THEORY  53 

different  exchange  values.  This  comes  about  because  the 
entrepreneur  (or  series  of  entrepreneurs)  who  produces 
commodity  A  may  have  been  compelled  to  pay  the  money 
wages  to  the  labor  producing  it  a  longer  time  before  A  can 
be  put  on  the  market  than  is  the  case  with  commodity  B, 
though  the  amount  of  wages  paid  in  both  cases  be  the  same. 
8.  In  the  end,  Ricardo's  theory  of  the  interest  difficulty 
reduces  itself  to  the  statement  that  has  just  been  finished. 
That  is  to  say,  the  above  is  the  true  interpretation  of  his 
argument.  But  Ricardo's  own  presentation  of  the  difficulty 
is  superficially  so  different  from  this  statement  that  it  will 
be  necessary  to  prove  this  interpretation  in  detail,  (i)  In 
the  first  place,  he  separates  the  general  case  of  "  profits  " 
paid  on  a  longer  "  advance "  of  wages  into  three  sub- 
divisions. 

"According  as  capital  is  rapidly  perishable,  and  requires  to  be 
frequently  reproduced,  or  is  of  slow  consumption,  it  is  classed 
under  the  heads  of  circulating  or  of  fixed  capital."  ("A  divis- 
ion not  essential,  and  in  which  the  line  of  demarcation  cannot 
be  accurately  drawn." — Note.) 

"  Two  trades  may  employ  the  same  amount  of  capital ;  but 
it  may  be  very  differently  divided  with  respect  to  the  portion 
which  is  fixed,  and  that  which  is  circulating."  "A  rise  in  the 
wages  of  labour  cannot  fail  to  affect  unequally  commodities 
produced  under  such  different  circumstances"  (in  respect  to  the 
proportions  of  these  two  kinds  of  capital  in  different  trades.)1 

Section  V  is  written  to  show  that  different  degrees  of 
durability  in  the  durable  capital  have  the  same  effect  as 
different  proportions  of  the  durable  to  the  circulating  cap- 
ital, and  is  merely  an  example  of  the  bad  arrangement  of 

1  Pp.  24-6. 


54 


LABOR  THEORY  OF  VALUE 


the  Principles.1  Formally,  there  is  a  third  case.  Goods 
slower  to  market  must  bring  more  "  profit."  But  all  cases 
come  to  the  same  thing,  i.  e.,  a  longer  investment  of  entre- 
preneur's "  capital  "  in  labor,  before  the  commodity  pro- 
duced can  be  put  finally  upon  the  market. 

(2)  In  the  second  place,  the  effect  of  all  this,  says 
Ricardo,  is  to  introduce  a  second  cause  of  variation  of 
"relative  values."  The 

"  variety  in  the  proportions  in  which  the  two  sorts  of  capital 
may  be  combined  introduces  another  cause,  besides  the  greater 
or  less  quantity  of  labour  necessary  to  produce  commodities,  for 
the  variations  in  their  relative  value  —  this  cause  is  the  rise  or 
fall  in  the  value  of  labour."  * 

A  rise  in  wages  affects  "  relative  values,"  because  wages, 
being  a  different  fractional  part  of  the  entrepreneur's  costs 
of  different  commodities,  the  whole  of  entrepreneur's  costs 
is  affected  in  varying  degrees  by  the  increase  of  this  one 
factor.  In  Ricardo's  view  a  rise  of  wages  means  simply  a 
fall  of  profits.  If  the  entrepreneur's  cost  of  production  of 
good  A  were  V%  wages  and  Vz  "profits,"  and  of  good  B  % 
wages  and  !A  "  profits,"  then  if  general  wages  rise  a  fixed 
percentage,  and  consequently  general  "  profits  "  fall  a  fixed 
percentage,  it  follows  that  the  entrepreneur's  costs  of  A 
and  B  will  change,  one  relatively  to  the  other,  though  the 
costs  of  these  goods  in  labor  are  not  altered.  He  concludes  : 

"  It  appears  that  in  proportion  to  the  durability  of  capital  em- 
ployed in  any  kind  of  production,  the  relative  prices  of  these 
commodities  on  which  such  durable  capital  is  employed,  will 
*  *  fall  as  wages  rise,  and  rise  as  wages  fall;  and  on  the 

1  The  distinction  between  the  two  kinds  of  capital  was  stated  to  be  a 
question  of  degree  in  the  first  section  on  this  subject. 
*P.  24. 


313]        RICARDO  AND  TRUE  CLASSICAL  THEORY  55 

contrary  those  which  are  produced  chiefly  by  labour  with  less 
fixed  capital,  or  with  fixed  capital  of  a  less  durable  character 
than  the  medium  in  which  price  is  estimated,  will  rise  as  wages 
rise,  and  fall  as  wages  fall."  * 

9.  Ricardo's  way  of  describing  the  interest  difficulty  is 
unnecessarily  roundabout,  but  a  more  important  point  is 
that  it  is  positively  misleading.  He  must  mean  that  inter- 
est and  wages  together  make  up  entrepreneur's  costs.  In 
the  cost  of  producing  one  commodity  interest  will  be  a  cer- 
tain fraction  of  the  whole;  in  the  cost  of  producing  another 
commodity  it  will  be  a  different  fraction.  Now,  says 
Ricardo,  if  the  general  rate  of  interest  or  of  wages  rises  or 
falls,  it  will  affect  the  total  cost  of  production  of  two  such 
commodities  in  different  degrees.2  Thus  a  rise  or  fall  of 
the  general  rate  of  wages  of  labor  is  a  cause  of  variation  of 
the  exchange  ratios  of  products,  as  well  as  the  cause  of 
changes  in  the  quantity  of  labor  required  to  produce  them. 
This  statement  is  misleading,  because  the  existence  of  in- 
terest throws  the  entrepreneur's  costs,  and  consequently  the 
normal  values  of  commodities,  out  of  proportion  to  their 
labor  costs  without  any  reference  to  variations  in  the  gen- 
eral rates  of  interest  or  of  wages.  At  any  given  time  values 
are  already  out  of  proportion  to  labor  costs,  whether  or  not 
there  be  a  future  change  of  the  ratio  of  wages ;  yet  Ricardo 
is  misled  in  his  illustrations  to  assume  the  proportionality 
before  the  wages  rate  changes.3  The  origin  of  Ricardo's 

'P.  35- 

*  Ricardo's  theory  that  a  rise  of  interest  must  accompany  a  fall  of 
wages  and  vice  versA  is  not  an  essential  part  of  the  present  problem. 
Interest  acts  as  a  cause  of  deviation  of  exchange  value  from  proportion- 
ality to  wages  cost,  whether  this  particular  theory  of  wages  and  interest 
be  adopted  or  not. 

*  Compare  the  same  unconscious  shifting  of  ground  in  the  discussion 
of  skilled  labor. 


•indirection  in  explaining  the  law  of  entrepreneur's  costs  lies 
in  the  preconceptions  of  the  "  philosophical  "  account  of 
value.  To  be  precise,  it  is  due  to  Ricardo' s  quarrel  with 
one  of  Smith's  two  "  philosophical "  standards,  namely,  the 
labor-command  standard.  According  to  this  standard,  if 
wages  rise  or  fall,  the  amount  of  a  given  commodity  re- 
quired to  command  a  day  of  labor  in  exchange  falls  or  rises. 
Smith  said,  in  effect,  that  the  "  exchangeable  value "  of 
commodities  in  general  falls  when  wages  rise.  He  could 
not  have  meant  pure  exchange  value  by  this,  but  Ricardo 
took  him  at  his  word,  and  proceeded  to  show  that  when  the 
exchange  ratio  between  day  labor  and  a  commodity  alters, 
the  exchange  value  of  the  labor  may  change  just  as  much  as 
that  of  the  commodity.  Therefore  he  concluded  early  in 
his  chapter  that  the  exchange  value  of  commodities  depends 
on  the  comparative  quantity  of  labor  required  for  their  pro- 
duction, and  not  (as  Adam  Smith  said)  on  the  greater  or 
less  compensation  which  is  paid  for  that  labor.1  On  account 
of  this  dispute,  he  is  led  to  state  the  qualification  of  the 
labor-cost  law,  due  to  interest,  in  terms  of  variation  of  the 
compensation  of  labor.  That  is,  he  qualifies  slightly  his 
original  statement  against  Smith.  The  false  philosophy  that 
labor  cost  is  the  essence  of  value  exercised  an  influence  upon 
the  statement  of  the  empirical  law  of  costs  which  was  truly 
baleful  in  English  political  economy.  Its  effect  on  termin- 
ology reached  at  least  into  the  writings  of  John  Stuart  Mill, 
who  sometimes  referred  to  cost  of  production  as  being  com- 
posed of  labor  and  profits! 2  Either  wages  and  profits  (in- 
terest), or  labor  and  abstinence,  but  not  labor  and  profits! 
10.  What  Ricardo  should  have  given  us  is  a  rectilinear 

»P.  5.    Principles. 

*See  also  Ricardo,   himself:  ^'The  value  of  almost  all  commodities 
is  made  up  of  labor  and  profits."    Letters  to  Malthus,  p.  225. 


315]        RICARDO  AND  TRUE  CLASSICAL  THEORY  57 

theory  of  entrepreneur's  costs.  For  a  theory  of  these  costs 
is  truly  all  he  has  offered.  As  for  an  ultimate  answer  to 
the  riddle  of  value — an  answer  not  contained  in  the  simple 
-empirical  law  of  costs — Ricardo  has  not  given  us  one.  For, 
in  answer  to  the  query,  why  labor  cost,  barring  the  qualifi- 
cations he  develops,  should  regulate  value,  he  has  said  noth- 
ing. He  has  not  even  said  what  labor  is ;  and  in  explaining 
the  ultimate  nature  of  economic  value,  and  the  relation  of 
labor  to  it,  it  will  not  suffice  to  trust  that  every  one  knows 
exactly  what  is  meant  by  labor.  It  should  be  understood, 
without  remark,  that  the  criticisms  here  passed  are  not  in 
the  least  directed  against  his  greatness  as  a  thinker.  His 
greatness  is  relative  to  his  time.  We  criticize  him  with 
reference  to  the  developed  theory  of  our  time;  if  we  did  not 
do  this,  this  history  would  be  a  mere  summary  of  Ricardo's 
chapter  on  value,  and  would  be  almost,  if  not  quite,  pointless. 

To  conclude,  Ricardo  makes  four  qualifications  of  the 
doctrine  of  the  labor-cost  regulation  of  value,  (i)  Labor 
must  be  expended  on  things  of  utility.  Utility  is  an  abso- 
lute condition  of  value.  (2)  Goods  to  be  subject  to  this 
law  of  value  must  be  reproducible.  The  unimportant  class 
of  scarcity  goods  has  a  value  entirely  independent  of  labor- 
cost.  (3)  Labor-cost  really  regulates  only  the  natural  or 
central  value  of  goods.  There  must  be  perfect  competition 
to  keep  the  market  value  at  the  natural  value.  (4)  Variety 
in  the  proportions  of  fixed  and  circulating  employer's  cap- 
ital causes  an  aberration  of  natural  value  from  proportion 
to  pure  labor-cost. 

These  points  reappear  explicitly  or  implicitly  in  all  labor 
accounts  of  value.  They  are  interesting  in  view  of  the 
estimates  of  Ricardo's  theory  as  being  absolute.  The  second 
and  fourth  counts  especially  negative  this  estimate.  The 
point  of  greatest  interest  in  this  connection  is  the  question 


5g  LABOR  THEORY  OF  VALUE         [3! 6 

as  to  how  much  of  a  trunk  remains  of  the  Ricardian  labor 
theory  after  so  much  bark  has  been  stripped  off.  Ricardo 
considered  the  theory  to  remain  for  practical  purposes  in- 
tact. The  fourth  count  is  the  only  one  that  gives  him  seri- 
ous concern,  and  though  he  is  plainly  much  impressed  with 
the  force  of  the  difficulty  while  he  is  treating  of  it,  and  con- 
cludes because  of  it  that  labor  is  not  a  precise  regulator  of 
value,  when  he  has  delivered  himself  of  this  statement  he 
proceeds  with  the  resolve  to  abstract  from  the  whole  diffi- 
culty, and  reason  as  if  the  thesis  first  advanced  were  un- 
qualified. 

"  In  estimating,  then,  the  causes  of  the  variations  in  the  value 
of  commodities,  although  it  would  be  wrong  wholly  to 
omit  the  consideration  of  the  effect  produced  by  a  rise  or 
fall  of  labour  *  it  would  be  equally  incorrect  to  attach  much 
importance  to  it;  and  consequently,  in  the  subsequent  part  of 
this  work,  though  I  shall  occasionally  refer  to  this  cause  of 
variation,  I  shall  consider  all  the  great  variations  which  take 
place  in  the  relative  value  of  commodities  to  be  produced  by 
the  greater  or  less  quantity  of  labour  which  may  be  required 
from  time  to  time  to  produce  them."  * 

This  citation  from  the  Principles,  edition  of  1821,  indi- 
cates the  position  Ricardo  usually  took.  But  occasionally 
he  appears  to  have  wavered  regarding  the  proper  emphasis 
of  the  qualification.  For  instance,  in  1820  he  wrote:  "I 
sometimes  think  that  if  I  were  to  write  the  chapter  on  value 
again  which  is  in  my  book,  I  should  acknowledge  that  the 
relative  value  of  commodities  was  regulated  by  two  causes 
instead  of  by  one,  namely,  by  the  relative  quantity  of  labour 
necessary  to  produce  the  commodities  in  question  and  by 

**".  *.,  wages. 
*  P.  34- 


317]        RICARDO  AND  TRUE  CLASSICAL  THEORY  59 

the  rate  of  profit "  .  .  .*  Ricardo's  theory  of  value,  as  qual- 
ified by  himself,  might  be  summarized :  Objects  of  utility, 
"  produced  by  labor  "  (the  function  of  factors  in  production 
other  than  labor  not  explained),  and  capable  of  further  pro- 
duction by  the  application  of  more  labor,  have  normal  values 
in  proportion  to  the  total  quantity  of  labor  required  to  pro- 
duce them,  except  that  this  proportionality  is  disturbed  "  by 
the  employment  with  labor  of  capital  of  various  degrees  of 
durability." 

NOTE.  Ricardo's  principle  of  rent  is  susceptible  of  development  into 
a  universal  principle  of  competitive  distribution.  To  J.  B.  Clark  this 
development  is  in  fact  due.  (In  divers  early  articles  in  the  American 
economic  periodicals.  Professor  Clark's  views  have  now  been  summed  up 
in  his  Distribution  of  Wealth.  See  especially  Chapters  iv,  viii,  xii  and 
xiii.)  Perfecting  the  reasoning,  by  means  of  which  Ricardo  endeavored 
to  get  rid  of  the  rent  of  land,  as  a  cause  of  the  divergence  of  the  ex- 
change value  of  products  from  proportionality  to  their  labor  costs,  Clark 
gets  rid  of  interest  on  capital  as  well.  What  is  left  of  the  product  of 
industry  after  interest  (including  land  rent  and  rent  of  other  capital 
goods)  has  been  deducted  is  denned  by  Professor  Clark  as  the  specific 
product  of  labor,  or  the  marginal  product  of  labor.  To  assert  propor- 
tionality of  the  specific  product  of  labor  to  its  labor  cost  is  a  very  differ- 
ent thing  from  asserting  that  the  total  product  of  land,  labor  and  capital 
in  any  given  business  is  governed  by  the  labor  cost  of  that  product, 
denning  the  labor  cost  as  Ricardo  did.  It  cannot  be  said  that  Ricardo 
in  any  way  realized  that  the  principle  of  land  rent  could  be  turned  to 
account  as  a  universal  principle  in  determining  shares  in  distribution. 
But  there  is  a  distant  hint  at  such  use  in  the  following  passage:  "The 
exchangeable  value  of  all  commodities,  whether  they  be  manufactured, 
or  the  produce  of  the  mines,  or  the  produce  of  land,  is  always  regulated, 
not  by  the  less  quantity  of  labour  that  will  suffice  for  their  production 
under  circumstances  highly  favourable,  and  exclusively  enjoyed  by  those 
who  have  peculiar  facilities  of  production,  but  by  the  greater  quantity  of 
labour  necessarily  bestowed  on  their  production  by  those  who  have  no 
such  facilities,  by  those  who  continue  to  produce  them  under  the  most 
unfavourable  circumstances,  meaning  by  the  most  unfavourable  circum- 
stances, the  most  unfavourable  under  which  the  quantity  of  produce  re- 
quired, renders  it  necessary  to  carry  on  the  production."  (P.  50.)  In 

1  Letters  to  McCulloch,  p.  71. 


6o  LABOR  THEORY  OF  VALUE 

Chapter  xi  of  the  present  essay  we  shall  attempt  to  make  clear  the  differ- 
ence between  the  assertion  that  the  exchange  value  of  the  entire  product 
of  a  given  industry  is  determined  by  its  labor  cost  and  an  assertion  that 
the  specific  product  of  labor  has  a  value  determined  by  its  labor  cost. 

The  following  chapters  will  contain  many  references  to  Ricardo. 
These  will  concern  minor  points  in  his  theory  which  are  best  taken  «p 
in  connection  with  the  arguments  of  subsequent  economists. 


CHAPTER  VI 

M'CULLOCH,  JAMES  MILL  AND  TORRENS.     ANTICIPATIONS 
OF  MARX'S  THIRD  VOLUME. 

I.  THE  three  minor  writers,  McCulloch,  James  Mill,  and, 
to  a  less  degree,  Torrens,  were  imitative  expounders  of  the 
Ricardian  political  economy.  While  their  views  were  not 
identical  with  those  of  Ricardo,  they  were  accustomed  to 
explain  themselves  by  pointing  out  wherein  they  differed 
from  the  master.  In  this  history  they  are  of  interest  be- 
cause each  endeavored  to  state  the  labor-cost  theory  in  a 
more  arbitrary  form  than  did  Ricardo  himself.  This 
chapter  could  well  be  entitled,  "  The  Labor  Theory  Run- 
ning Riot."  McCulloch  and  Mill  endeavored  to  reason  out 
of  existence  the  qualification  Ricardo  placed  in  the  doctrine 
on  account  of  interest,  and  Torrens  thought  he  avoided  the 
difficulty  by  stating  that  value  is  determined  by  cost  in 
"  accumulated  labor."  An  interesting  fact  in  the  literary 
history  of  the  labor  theory,  and  one  which,  to  the  best  of 
my  knowledge,  has  not  hitherto  been  brought  to  light,  is 
that  McCulloch  anticipated  Karl  Marx's  solution  of  the 
"  organic  composition  of  capital  "  problem.  Marx  closed 
his  theory  of  value,  in  the  first  volume  of  Das  Kapital,  with 
the  confession  that,  to  all  appearances,  the  facts  of  market 
values  contradict  the  theory.  He  promised,  however,  to 
show,  in  a  later  volume,  that  in  reality  there  is  no  contra- 
diction.1 When  the  second  volume  appeared  only  to  defer 

1  Das  Kapital,  ist  ed.f  pp,  285,  286,  508,  n.  See  Bohm-Bawerk,  Karl 
Marx  and  the  Close  of  his  System,  p.  24. 

319]  6l 


62  LABOR  THEORY  OF  VALUE  [-520 

to  the  third  the  promised  solution,  "  a  regular  prize  essay 
contest "  sprang  up  in  Germany,  and  endured  for  ten  years, 
in  which  the  participants  endeavored  to  forecast  what  Marx's 
solution  would  be.  No  one  was  successful.1  The  answer 
to  the  enigma,  as  it  appeared  in  the  posthumous  third  vol- 
ume of  Das  Kapital,  is  precisely  the  one  McCulloch  gave  to 
the  same  question. 

i.  McCuLLOCH. 

2.  We  shall  not  retrace  the  general  lines  of  Ricardo's  ex- 
position as  they  reappear  in  McCulloch's  writings.2  In  the 
course  of  the  numerous  editions  of  his  Principles,  and  in  his 
other  observations  upon  value,  this  writer  managed  to  com- 
mit nearly  every  conceivable  blunder  that  could  connect 
itself  with  the  labor  theory.8  From  time  to  time,  Ricardo 
mildly  reproved  his  disciple  for  his  rigidity: 

"  You  go  a  little  farther  than  I  go  in  estimating  the  value 
of  commodities  by  the  quantity  of  labour  required  to  produce 
them.  You  appear  to  admit  of  no  exception  or  qualification 
whatever,  whereas  I  am  always  willing  to  allow  that  some 
of  the  variations  in  the  relative  value  of  commodities  may 
be  referred  to  causes  distinct  from  the  quantity  of  labour 
necessary  to  produce  them."  * 

1  Bohm-Bawerk,  op.  cit.,  p.  26. 

'The  writings  herein  referred  to  are  his  Principles  of  Political 
Economy,  4th  ed.,  Edinb.,  1849,  and  his  extensive  notes  on  Adam 
Smith's  text  in  the  McCulloch  edition  of  the  Wealth  of  Nations,  4 
vols.,  Ed'nb.,  1828. 

s  In  his  Capital  and  Interest,  pp.  97-102,  Bohm-Bawerk  devotes  a  few 
pages  to  McCulloch's  theory  of  interest,  which  is  interwoven  with  his 
theory  of  value.  Bohm-Bawerk  concludes:  "McCulloch's  utterances 
on  the  subject  are  one  great  collection  of  incompleteness,  irrationality 
and  inconsistency."  The  examples  of  McCulloch's  reasonings  cited  by 
Bohm-Bawerk  show  the  above  judgment  to  be  scrupulously  just. 

^Letters  of  Ricardo  to  McCulloch  (Pub.  Ant.  Econ.  Assn.,  Vol.  10), 
pp.  131-2. 


32 1  ]         M'CULLOCH,  JAMES  MILL  AND  TORRENS  63 

The  cases  of  the  value  of  standing  timber,  previous  to  the 
employment  of  labor  upon  it,  or  of  the  value  of  old  wine, 
which  Ricardo  freely  confessed  were  beyond  his  philosophy 
•of  value,1  had  no  terrors  for  McCulloch.  In  his  abandon- 
ment to  dogma,  he  solves  the  difficulty  with  ease  by  the  fol- 
lowing definition,  one  of  the  most  crassly  ridiculous  orig- 
inalities in  the  annals  of  political  economy.  It  finds  a  place 
in  this  history  to  illustrate  to  what  extremes  the  labor  theory 
could  be  carried: 

"  Labour  may  properly  be  defined  to  be  any  sort  of  action  or 
operation,  whether  performed  by  man,  the  lower  animals,  ma- 
chinery, or  natural  agents,  that  tends  to  bring  about  any 
desirable  result."  2 

The  distinction  between  the  operations  of  men  and  those^of 
machinery  and  natural  agents  is 

"  on  the  whole  objectionable  because  it  gives  countenance  to  the 
idea  that  there  is  some  radical  difference  between  the  labour 
of  man  and  of  machinery,  etc.,  whereas,  in  so  far  as  the  doc- 
trines and  conclusions  of  political  economy  are  concerned,  they 
are  in  all  respects  the  same."  * 

Consider  the  example  of  a  cask  of  wine,  which  is  entirely 
finished  as  far  as  labor  bestowed  on  it  is  concerned,  and  now 
possesses  a  certain  exchange  value.  If  let  stand  a  few  years 
it  will  be  found  to  possess  additional  value.  To  force  this 
case,  McCulloch  has  decided  to  define  whatever  it  be  that 
"  works  "  in  the  wine  to  be  labor,  and  thus  to  affirm  that 
the  increased  value  is  occasioned  by  the  increased  quantity 
of  labor  employed  upon  it.  Malthus  has  made  a  rare  criti- 
cism on  this  idea  that  cannot  be  omitted : 

1  See  passage  from  a  letter  to  McCulloch,  quoted  ante,  p.  42. 

2  McCulloch's  edition  of  the  Wealth  of  Nations,  vol.  iv,  note  i,  p.  75. 
llbid.,  p.  77- 


64  LABOR  THEORY  OF  VALUE  [322 

"  There  is  nothing  that  may  not  be  proved  by  a  new  defini- 
tion. A  composition  of  flour,  milk,  suet,  and  stones  is  a  plum- 
pudding  ;  if  by  stones  be  meant  plums.  Upon  this  principle  Mr. 
McCulloch  undertakes  to  show  that  commodities  do  really 
exchange  for  each  other  according  to  the  quantity  of  labour 
employed  upon  them :  and  it  must  be  acknowledged  that  in  the 
instance  which  he  has  chosen  he  has  not  been  deterred  by  ap- 
parent difficulties."  * 

Should  we  grant  McCulloch's  definition  of  labor,  the  ex- 
planations which  he  bases  upon  it  involve  an  uncommonly 
"  vicious  "  circle.  Having  included  in  labor  any  of  the 
operations  of  all  "  nature  "  which  tend  to  produce  a  desir- 
able result,  he  is  forced  to  place  aside  desirable  natural 
operations  that  are  "  gratuitous."  z  Having  no  way  to 
measure  natural  operations  by  themselves,  he  decides,  in 
effect,  that  whenever  a  commodity  is  found  which  possesses 
an  exchange  value  in  excess  of  that  which  would  be  pro- 
portionate to  its  cost  in  human  labor,  the  thing  to  do  is  to 
add  in  enough  labor  of  natural  forces  to  restore  the  desired 
proportionality.  Subsequently  he  adopted  another  line  of 
reasoning,  incompatible  with  this  one,  but  his  later  method 
of  establishing  the  absolute  truth  of  the  labor-cost  theory 
was  of  the  same  calibre.3 

3.  The  fatal  difficulty  in  which  the  Marxian  theory  of 
value  culminated,  due  to  the  fact,  as  Marx  described  it,  that 
the  "  organic  composition  of  capital "  is,  for  technical 
reasons,  different  in  different  industries,  is  the  same  as  the 
difficulty  of  "  fixed  and  circulating "  capital,  which  occu- 
pied so  large  a  share  of  Ricardo's  and  McCulloch's  atten- 
tion. The  problem  as  discussed  by  Marx  differs  from 

1  Malthus,  Definitions,  pp.  100-101. 

'McCulloch  ed.  Wealth  of  Nations,  vol.  iv,  pp.  77-78. 

1  Principles,  4th  ed.,  pp.  371-3. 


323]         M'CULLOCH,  JAMES  MILL  AND  TORRENS  6$ 

Ricardo's  greatly  in  terminology,  and  considerably  in  Cer- 
tain other  external  features,  but  the  identity  of  the  two  in 
essence  can  easily  be  shown. 

From  his  general  law  that  the  value  of  a  commodity  is 
governed  by  its  labor  cost,1  Marx  made  a  law  of  wages 
follow  as  a  corollary,  namely,  that  the  value  of  labor,  its  ex- 
change-value, or  wages,  is  governed  by  its  cost  of  production 
in  labor.  It  is  very  hard  to  find  a  labor-cost  of  production 
of  labor,  so,  by  an  act  of  logical  legerdemain,  this  becomes 
the  labor-cost  of  labor's  subsistence.2  The  value  produced 
by  labor  depends  upon  the  duration  of  its  exertion;  but, 
says  Marx,  the  exchange  -value  of  labor  is  a  different  thing. 
If  laborers  commonly  work  ten  hours  a  day  for  their  em- 
ployers, while  six  hours  of  labor  will  produce  a  day's  sub- 
sistence, the  value  produced  by  a  day  of  labor  is  as  ten,  while 
the  wages  paid  for  it  are — in  virtue  of  the  general  law  of 
value — as  six.  The  difference  between  the  value  produced 
by  labor  and  the  value  of  labor — in  this  case  (adopting  the 
labor-cost  unit  of  value)  four  hours  of  value — is  the  famous 
"surplus-value,"  and  the  four  hours  a  day  is  called  the 
surplus  labor  time.  We  shall  have  to  adopt  a  special  and 
purely  temporary  terminology  to  describe  the  complication 
in  this  theory  about  to  be  discovered.8  By  value  we  mean 

'We  omit  the  qualification  regarding  "  socially  necessary  "  labor,  and 
the  theory  of  skilled  labor  as  "condensed  labor,"  as  not  required  for 
our  present  point. 

J  If  one  granted,  for  the  sake  of  argument,  both  the  labor-cost  law  of 
value  and  the  iron  law  of  wages,  we  should  still  lack  the  slightest  jus- 
tification for  deriving  the  latter  as  a  corollary  from  the  former.  The 
only  theoretical  basis  of  the  iron  law  of  wages  is  a  rigid  Malthusian  law 
of  population,  or  labor  supply,  the  alleged  law  so  greatly  abhorred  by 
Marx  and  all  socialists. 

s  The  elaborate  special  terminology  developed  by  Marx  for  the  problem 
(not  followed  here)  will  be  found  explained  in  full  in  Bohm-Bawerk's 


66  LABOR  THEORY  OF  VALUE         [324 

exchange-value,  unless  otherwise  specified.  The  outlay  of 
value  made  by  an  entrepreneur  in  labor,  raw-material, 
machinery,  etc.,  returns  to  him  in  the  course  of  time  a  cer- 
tain value  of  products,  which  is  greater  than  the  outlay  re- 
quired to  produce  them.  The  excess  of  this  value  over  the 
outlay  we  shall  call  the  "  profit  fund."  Now,  according  to 
Marx,  surplus-value  is  the  sole  source  of  this  profit  fund. 
The  reasoning  to  support  this  runs  as  follows:  The  entre- 
preneur's investments  in  machinery  and  raw-material,  says 
Marx,  cannot  contribute  anything  to  this  fund.  For,  ac- 
cording to  the  labor  dialectic,  all  the  value  these  goods  can 
contribute  to  their  products  is  derived  from  their  own  labor- 
costs,  and  the  law  of  value  forces  the  entrepreneur  to  pay 
this  value  for  them  in  full.  They  can,  therefore,  afford 
him  no  surplus.  But  the  labor  he  buys  is  a  different  kind 
of  thing.  It,  and  it  only,  as  just  explained,  gives  more  value 
to  the  product  than  he  is  forced  by  the  law  of  value  to  pay 
for  it. 

We  are  now  face  to  face  with  the  great  difficulty.  If 
surplus-value  is  the  sole  source  of  the  profit  fund,  the  profit 
funds  of  different  business  units  ought  to  be  in  proportion 
to  the  surplus  labor  time  immediately  exploited  in  them. 
Since  the  surplus  labor  time  in  each  day  of  labor  depends  on 
the  general  rate  of  wages,  there  is  a  general  rate  of  surplus 
labor  time  per  labor  day — e.  g.,  four  hours  in  ten — and  the 
profit  fund  of  every  business  would  be  directly  in  proportion 
to  the  number  of  laborers  it  employed.  This  is  absolutely 
not  the  case  in  fact.  "  It  appears,  therefore,"  says  Marx, 

excellent  essay  previously  cited.  This  little  book  presents  Marx's 
theory  of  value,  the  "contradiction"  and  the  outcome,  in  the  clearest 
possible  form.  It  would  be  useless  to  infringe  on  the  territory  covered 
by  this  work,  but  Dr.  v.  Bohm-Bawerk  did  not  mention  the  existence 
of  the  same  "contradiction"  in  classical  English  theory. 


325]         M'CULLOCH,  JAMES  MILL  AND  TORRENS  67 

"  that  here  the  theory  of  value  is  irreconcilable  with  the 
actual  movement  of  things."  l 

For  technical  reasons,  the  proportions  in  which  the  en- 
trepreneur's outlays  are  invested  in  labor  on  the  one  hand, 
and  other  production-goods  on  the  other  hand,  are  different 
in  different  lines  of  business.  The  make-up  of  the  entre- 
preneur's outlay  with  respect  to  these  proportions  Marx 
calls  the  "  organic  composition  "  of  his  capital.2  The  facts 
of  life  are  that  equal  capitals,  in  the  sense  of  equal  outlays, 
in  different  employments  tend  to  produce  equal  "  profit 
funds,"  regardless  of  their  organic  composition.  Now  what 
the  profit  fund  actually  turns  out  to  be,  depends  on  the  sell- 
ing price  or  value  of  the  product.  If  we  take  a  capital  spent 
in  large  proportion  for  labor,  the  large  amount  of  surplus 
labor  time  exploited  ought  to  give  the  product  a  value 
very  much  in  excess  of  the  outlay,  and  afford  a  large 
profit  fund.  If  we  take  a  precisely  equal  capital,  spent 
in  very  small  proportion  for  labor,  and  almost  entirely  for 
machinery,  etc.,  the  relatively  small  amount  of  surplus  labor 
time  exploited  ought  to  make  the  value  of  the  product  not 
nearly  so  great  as  that  of  the  first  capital. 

Since  Marx  frankly  admits  that  in  fact  competition  makes 
the  value  of  these  products  equal  instead  of  unequal,  how 
does  he  "  solve  the  contradiction  "  and  redeem  his  theory? 
The  actual  "  profit  "  (as  defined  here  temporarily)  afforded 
by  the  selling-value  of  the  products  is,  throughout  soci- 
ety, on  the  average,  say  20  per  cent,  of  that  value.  Where 
the  "  organic  composition  of  capital "  in  a  particular 
industry  happens  to  be  such  that  the  profit  which  ought  to 

1  Das  Kapital,  v.  iii,  p.  131;  quoted  by  Bohm-Bawerk,  op.  tit.,  p.  49. 

3 "  Die  organische  Zusammensetzung 'des  Kapitals,"  Das  Kapital, 
vol.  iii,  p.  124. 


68  LABOR  THEORY  OF  VALUE         [326 

be  produced  according1  to  the  theory  is  also  the  actual  profit, 
here  the  value  of  the  product  required  by  the  theory  will  be 
the  same  as  the  actual  value.  But  in  some  industries  where 
the  proportion  of  labor  purchased  in  the  total  outlay  is  low, 
the  actual  value  will  be  above  the  theoretical  value,  whereas 
in  other  industries,  under  reverse  conditions,  the  actual 
value  will  be  below  the  theoretical  value.  Now,  concludes 
Marx,  the  variations  of  actual  values  (called  by  Marx  sim- 
ply "prices")  above  and  below  the  theoretical  or  labor 
values  (called  by  Marx  simply  "values")  counterbalance 
or  cancel  one  another,  and  the  total  actual  values  of  all  com- 
modities collectively  remain  equal  to  their  total  labor  values.* 

The  "theoretical  values,"  so-called  above,  are  those  which 
would  be  in  proportion  to  labor  costs.  The  law  of  labor 
cost  declares  that  the  value  of  any  given  commodity  is  de- 
termined by  its  cost  in  labor.  In  admitting  that  in  fact 
actual  particular  values  do  not  follow  this  law,  Marx  has 
abandoned  the  law.  .(For  a  consideration  of  the  erroneous 
claim  that  the  average  rate  of  surplus-value  determines  the 
average  rate  of  profits,  the  reader  may  refer  to  Bohm- 
Bawerk's  essay.) 

The  point  desired  to  be  made  here,  is  that  Ricardo's  diffi- 
culty of  "  fixed  and  circulating  "  capital  is  the  same  as  that 
in  the  Marxian  theory.  Ricardo  stated  that  variations  in 
the  proportions  in  which  fixed  and  circulating  capitals  are 
combined  in  different  industries  introduces  a  second  cause 
of  change  in  the  relative  value  of  a  commodity.  The  first 

'Vol.  Hi,  p.  138.  See  Bohm-Bawerk,  op.  tit.,  p.  67  et  seq.  There 
are  other  arguments  advanced  by  Marx  for  the  redemption  of  his  theory, 
considered  in  order  by  Bohm-Bawerk,  but  that  given  is  the  first  and 
principal  one.  The  second  is  that  the  law  of  value  governs  the  move- 
ment of  prices.  This  is  analogous  to,  if  not  identical  with,  Ricardo's 
claim,  that  changes  in  labor-cost  are  the  causes  of  changes  of  values. 
See  ante,  pp.  54~S- 


327]         M'CULLOCH,  JAMES  MILL  AND  TORRENS  69 

cause  is  change  in  the  quantity  of  labor  required  to  produce 
a  commodity;  the  second  is  a  change  in  the  general  rate  of 
wages.  In  the  chapter  in  this  history  devoted  to  Ricardo, 
it  has  been  argued  at  length  1  that  what  Ricardo  said  was 
only  a  round-about  explanation  of  the  fact  that  the  values 
required  by  the  labor  theory  are  not  the  same  as  actual 
values. 

McCulloch,  following  Ricardo,  discusses  the  same  prob- 
lem in  the  same  way,  and  concludes  that  changes  in  the  rate 
of  wages  will  cause  variations  of  values  aside  from  the  in- 
fluence of  pure  labor  cost.  But  he  adds  to  what  Ricardo 
has  said,  attempting  a  justification  of  the  pure  labor-cost 
theory  on  the  grounds  that  it  regulates  average  value.  I 
trust  what  has  been  said  will  make  it  clear  that  McCulloch's 
defense  is  identical  in  essence  with  that  of  Marx,  though 
different  in  form.  McCulloch  wrote  as  follows,  in  1849: 

"  It  should  also  be  observed,  that  though  fluctuations  in  the 
rate  of  wages  occasion  some  variation  in  the  exchangeable 
value  of  particular  commodities,  they  neither  add  to  nor  take 
from  the  total  value  of  the  entire  mass  of  commodities.  If  they 
increase  the  value  of  those  produced  by  the  least  durable 
capitals,  they  equally  diminish  the  value  of  those  produced  by 
the  more  durable  capitals.  Their  aggregate  value  continues, 
therefore,  always  the  same.  And  though  it  may  not  be  strictly 
true  of  a  particular  commodity,  that  its  exchange  value  is  di- 
rectly as  its  cost,  or  as  the  quantity  of  labour  required  to 
produce  it  and  bring  it  to  market,  it  is  most  true  to  affirm  this 
of  the  mass  of  commodities  taken  together."  2 

McCulloch  also  expressed  the  same  thought  twenty-one  years 
earlier,  in  1828.  Though  a  change  of  the  rate  of  wages  may 
cause  a  particular  commodity  to  vary  from  its  "  real  value," 

1  Pp.  55  et  seq. 

1  Principles,  4th  ed.,  p.  371  (1849).     The  italics  are  mine. 


7o  LABOR  THEORY  OF  VALUE  [-528 

"  the  exchangeable  value  of  some  other  commodity  must  vary 
to  the  same  extent  in  a  contrary  direction."  l 

Marx  says  the  same,  and  concludes  that  the  variations  of 
the  actual  from  the  theoretical  values  cancel  one  another.2 
Both  McCulloch  and  Marx  were  involved  in  a  hopeless  en- 
deavor to  overcome  the  difficulty  of  interest. 

2.  JAMES  MILL. 

4.  James  Mill  held  that  value  depends,  in  the  first  in- 
stance, on  demand  and  supply,  but  ultimately  upon  cost  of 
production.3  Cost  of  production  consists  of  cost  in  capital 
and  labor  combined,  but  the  capital  element  can  be  reduced 
to  labor,  and  in  the  last  resort  quantity  of  labor  cost  deter- 
mines the  exchange  value  of  commodities.4  But  there  is 
an  argument  which  is  brought  to  controvert  this  conclusion. 

"  It  is  said  that  the  exchangeable  value  of  commodities  is 
affected  by  time,  without  the  intervention  of  labour;  because, 
when  profits  of  stock  must  be  included,  so  much  must  be  added 
for  every  portion  of  time  which  the  production  of  one  com- 
modity requires  beyond  that  of  another."  8 

Mill  takes  the  regular  example  of  the  cask  of  wine,  worth 
twenty  sacks  of  flour  now — because  it  cost  the  same  amount 
of  labor — but  worth  more  if  kept  in  a  cellar  some  years. 

1  McCulloch  edition  of  the  Wealth  of  Nations,  vol.  iv,  note  viii,  p.  200. 

*"Dass  die  Abweichungen  vom  Werth  .  .  .  sich  gegeneinander  auf- 
heben."  Das  Kapital,  vol.  iii,  p.  140.  James  Mill,  in  Elements  of 
Political  Economy,  pp.  112-113  (1826),  said  the  same  thing.  When  the 
general  rate  of  wages  varies,  for  "the  aggregate  of  commodities,  taken 
all  together,  there  is  neither  fall  nor  rise." 

1  Elements  of  Political  Economy,  London,  1826.  This  statement 
probably  came  from  Malthus,  who  laid  down  the  general  lines  of  the 
theory  of  value  in  this  same  way  in  1820. 

•P.  96.  'Pp.  96-7. 


329]         M'CULLOCH,  JAMES  MILL  AND  TORRENS  ji 

Now,  he  says,  the  objection  here  is  that  there  is  an  addition 
of  value  without  an  application  of  more  labor,  and  that 
therefore  quantity  of  labor  does  not  regulate  value.  But 

"  this  objection  is  founded  on  a  misapprehension  with  respect  V 
to  the  nature  of  profits.  Profits  are,  in  reality,  the  measure  of 
quantity  of  labour;  and  the  only  measure  of  quantity  of  labour 
to  which,  in  the  case  of  capital,  we  can  resort.  This  can  be 
established  by  rigid  analysis.  If  two  commodities  are  pro- 
duced, a  bale  of  silk,  for  example,  for  immediate  consumption, 
and  a  machine,  which  is  an  article  of  fixed  capital;  it  is  cer- 
tain, that  if  the  bale  of  silk  and  the  machine  were  produced  by 
the  same  quantity  of  labour,  and  in  the  same  time,  they  would 
exactly  exchange  for  one  another:  quantity  of  labour  would 
clearly  be  the  regulator  of  their  value.  But  suppose  that  the 
owner  of  the  machine,  instead  of  selling  it,  is  disposed  to  use 
it,  for  the  sake  of  the  profits  which  it  brings ;  what  is  the  real 
character  and  nature  of  his  action?  Instead  of  receiving  the 
price  of  his  machine  all  at  once,  he  takes  a  deferred  payment, 
so  much  per  annum :  he  receives,  in  fact,  an  annuity,  in  lieu  of 
the  capital  sum;  an  annuity  fixed  by  the  competition  of  the 
market,  and  which  is  therefore  an  exact  equivalent  for  the 
capital  sum.  Whatever  the  proportion  which  the  capital  sum 
bears  to  the  annuity,  whether  it  be  ten  years'  purchase,  or 
twenty  years'  purchase,  such  a  proportion  is  each  year's  annuity 
of  the  original  value  of  the  machine.  The  conclusion  therefore 
is  incontrovertible:  as  the  exchangeable  value  of  the  machine, 
had  it  been  sold  as  soon  as  made,  would  have  been  the  prac- 
tical measure  of  the  quantity  of  labour  employed  in  making 
it,  one-tenth  or  one-itwentieth  of  that  value  measures  also  a 
tenth  or  a  twentieth  of  the  quantity  of  labour."  1 

When  an  entrepreneur  pays  a  certain  sum  for  a  machine, 
which  he  uses  up  in  production,  at  the  end  a  certain  sum  of 
value  produced  stands  in  the  place  of,  and  is  imputed  to,  the 
1  Pp.  99-100.    The  italics  are  mine. 


72  LABOR  THEORY  OF  VALUE  [330 

destroyed  machine.  This  sum  of  value  is  normally  greater 
than  the  value  of  the  machine,  being  sufficient,  in  fact,  to  re- 
place the  machine  and  leave  a  marginal  fund  of  value,  which 
we  call  interest.  But  Mr.  Mill's  text  discloses  the  fact  that 
it  is  the  gross  value  of  the  product  of  the  machine  which  he 
designates  by  the  term  "  profit."  If  the  machine  lasts  ten 
years,  the  entrepreneur  receives  these  gross  profits  in  ten 
annual  installments.  In  purchasing  the  machine  he  has  re- 
munerated the  labor  which  was  expended  in  its  production. 
Now  he  receives  back  that  remuneration  in  ten  parts.  Com- 
petition makes  these  ten  parts  the  "equivalent"  of  the  orig- 
inal whole. 

"  It  thus  appears  that  profits  are  simply  remuneration  for 
labour.  They  may,  indeed,  without  doing  any  violence  to 
language,  hardly  even  by  a  metaphor,  be  denominated  wages : 
the  wages  of  that  labour  which  is  applied,  not  immediately  by 
Jiand,  but  mediately  by  the  instruments  which  the  hand  has 
produced."  * 

Such  was  the  puzzle  of  value  in  "  classical "  times  that  a 
thinker  of  repute  could  resort  to  explanations  shallow  almost 
beyond  belief.  It  is  the  italicized  line,  of  course,  which 
begs  the  question.  The  assertion  that  the  gross  return  from 
a  machine  is  the  exact  equivalent  of  its  cost  price,  might 
mean  that  the  sum  total  of  the  "  annuities,"  in  which  the 
entrepreneur  receives  this  return,  is  equal  to  the  cost  price 
of  the  machine  to  him.  In  this  case  the  statement  is  simply 
false.  But  if  the  intention  be  to  admit  that  the  sum  of 
annuities  is  more  than  equal  to  the  cost  price,  the  plain  im- 
port of  the  admission  is  unconsciously  concealed  under  the 
word  "equivalent"  For  the  excess  of  the  value  of  the 
product  of  the  machine  which  affords  this  surplus  in  the 

*Pp.  102-3. 


33 1  ]         M'CULLOCH,  JAMES  MILL  AND  TORRENS  73 

annuities  is  precisely  the  value  out  of  proportion  to  the  cost 
of  the  product  in  labor  indirectly  applied  to  it,  that  is,  ap- 
plied through  the  machine.  To  return  to  the  cask  of  wine, 
by  hypothesis,  its  value  is  in  excess  of  proportionality  to  the 
quantity  of  labor  it  has  cost.  And  yet  Mr.  Mill  sets  about 
to  explain  that  its  value  is,  nevertheless,  in  proportion  to  the 
quantity  of  labor  it  has  cost,  because  it  is  a  general  principle 
that  "  profits  "  are  "  really  wages  of  labour."  In  fact, 

"  the  case  of  the  wine  in  the  cellar  coincides  exactly  with  that  \/ 
of  a  machine  worn  out  in  a  year,  which  works  by  itself  without 
additional  labour.  The  new  wine,  which  is  one  machine  is 
replaced  by  its  produce,  the  old  wine,  with  that  addition  of 
value  which  corresponds  with  the  return  to  capital  employed 
upon  the  land  [in  Mill's  view,  the  capital  that  sets  the  rate  of 
interest  for  all  other]  ;  and  the  account  which  is  to  be  rendered 
of  the  one  return,  is  also  the  true  account  of  the  other."  * 

Although  Mr.  Mill  has  taken  trouble  to  show  that  it  is  a 
misapprehension  to  suppose  that  difference  in  the  time  re- 
quired to  produce  commodities  throws  their  values  out  of 
proportion  to  their  labor  costs,  he  now  caps  the  climax  of 
his  strange  argument  by  explaining,  directly  after  Ricardo, 
how  a  rise  or  fall  in  the  general  rate  of  wages  will  alter  the 
exchange  ratios  of  commodities,  irrespective  of  changes  in 
their  labor  costs.  As  explained  in  the  chapter  on  Ricardo, 
this  is  but  an  indirect  way  of  showing  that  the  existence  of 
interest  is  fatal  to  the  law  of  labor  cost,  and  that  the  length 
of  time  through  which  interest  must  be  taken  is  a  material 
factor  in  determining  the  cost  of  production  of  commodi- 
ties. The  failure  of  Mr.  Mill,  as  a  disciple  of  Ricardo,  to 
understand  the  real  meaning  of  the  master's  qualification  of 
the  labor-cost  law,  serves  but  to  prove  the  assertion  already 

'P.  104. 


74  LABOR  THEORY  OF  VALUE         [332 

made,  that  Ricardo's  round-about  argument  on  this  subject 
was  most  misleading.  As  for  Mr.  Mill,  his  treatment  of 
the  interest  difficulty  was  a  bungle  from  first  to  last. 

3.  TORRENS. 

5.  Torrens  explains  at  great  length  why  commodities  can- 
not be  exchanged  in  primitive  society  on  any  other  basis 
than  that  of  labor  cost;  but  concludes  that  the  forces  which 
produce  this  result  in  early  times  cause  products  to  ex- 
change, under  advanced  conditions,  according  to  their  cap- 
ital cost.  A  commodity's  cost  in  capital,  measured  as  the 
money  outlay  of  the  capitalist-employer,  is  its  "  natural 
price."  Actual  exchange  value  does  not,  as  Ricardo  and 
Malthus  say,  tend  to  settle  at  natural  price,  because  there  is 
a  permanent  difference  between  these  quantities,  and  this 
difference  constitutes  "  profits."  *  It  is  true  that  writers 
who  claim  that  the  actual  price  tends  to  come  to  the  "  nat- 
ural price  "  include  profits  in  natural  price, 

"  But  this  classification  is  highly  unphilisophical  and  incor- 
rect." 2  "  We  cannot  assert  that  the  profit  of  stock  is  included 
in  the  cost  of  production,  without  affirming  the  gross  absurdity 
that  the  excess  of  value  above  the  expenditure,  constitutes  a 
part  of  expenditure."  8 

The  difference  of  view  between  Malthus  and  Torrens  is 
easily  explained.  Malthus  means  by  natural  price,  normal 
value.  Torrens  has  in  mind  one  variety  of  the  "  natural 
price  "  of  the  "  philosophical  "  account  of  value. 

"  Natural  price  is  that  which  we  must  give  in  order  to  ob- 
tain the  article  we  want  from  the  great  warehouse  of  nature, 
and  is  the  same  thing  as  cost  of  production."  * 

1  Essay  on  the  Production  of  Wealth,  London,  1821,  p.  51.  Torrens 
considered  his  theory  of  "exchangeable  value"  quite  original,  (Preface, 
P.  7-) 

•P.  Si.  8P-53.  4P.  50. 


333]         M'CULLOCH,  JAMES  MILL  AND  TORRENS  75 

In  primitive  times  this  was  labor;  in  present  times  it  is 
capital. 

Torrens  really  attempted  an  "  empirical  "  law,1  namely, 
that  the  exchange  values  of  commodities  are  determined  by 
their  cost  in  capital  to  the  entrepreneur,  but  are  in  excess  of 
the  cost  by  a  constant  percentage.  Exchange  values  are 
still  determined  by  the  cost,  because  the  percentage  of  this 
excess  is  reckoned  on  the  cost.  In  criticism  of  this,  it  is 
easy  to  show  that,  as  an  empirical  account,  the  only  possible 
way  of  defining  entrepreneur's  cost  to  show  that  it  does 
regulate  value  is  to  include  interest  ("  profits  ")  in  the  cost. 
The  "  philosophical  "  account  is  brought  to  bear  on  the  law 
of  entrepreneur's  costs  only  to  injure  its  statement.  Inter- 
est is  a  part  of  the  cost  of  any  particular  commodity,  in  the 
sense  that  it  must  be  paid  to  call  forth  capital  to  aid  in  its 
production,  just  as  wages  must  be  paid  to  call  forth  labor. 
If  interest  be  excluded  from  entrepreneur's  costs,  the  state- 
ment of  Torrens  that  the  value  of  the  product  will  still  be  in 
proportion  to  cost  cannot  bear  the  slightest  examination. 
The  total  process  of  the  production  of  most  goods  is  con- 
ducted by  a  series  of  entrepreneurs.  If  we  take  any  two 
commodities  of  equal  market  value,  the  briefest  considera- 
tion will  show  that  their  costs  of  production  (in  the  sense 
employed  by  Torrens),  merely  to  the  last  entrepreneur 
making  them,  may  be  quite  unequal.  As  Ricardo  pointed 
out,  if  one  commodity  takes  longer  to  market  after  the  en- 
trepreneur makes  his  outlay  than  another,  the  amount  of 
profits  which  its  market  value  must  afford  will  be  greater, 
so  that  its  cost  (as  Torrens  defines  it)  must  be  less.  But 
considering  the  entire  cost  of  production  to  the  series  of 
entrepreneurs,  the  "  profits  "  of  each  entrepreneur  increase 

144  Empirical,"  in  the  particular  sense  of  this  term,  adopted  in  the 
opening  chapter  of  this  essay. 


76  LABOR  THEORY  OF  VALUE         [334 

the  necessary  money  outlay  of  the  next  entrepreneur  suc- 
ceeding him,  who  uses  the  product  of  the  first  as  production 
goods.  If  Torrens  should  permit  the  profits  of  entrepre- 
'  neurs  earlier  in  the  series  surreptitiously  to  be  included  in 
the  cost  to  later  entrepreneurs,  he  would  be  abandoning  his 
definition  of  cost.  But  if  he  excludes  this  element  of  profits 
to  the  whole  series  from  the  cost  to  the  whole  series,  it  is  not 
true  (for  the  same  reason  which  applied  to  the  case  of  the 
single  entrepreneurs)  that  the  values  would  be  in  proportion 
to  costs  of  production. 

6.  Unfortunately,  the  influence  of  the  philosophical  ac- 
count upon  the  thought  of  Torrens  did  not  exhaust  itself  in 
the  havoc  it  played  with  his  theory  of  entrepreneur's  cost. 
Perforce,  he  must  give  a  new  version  of  the  theory  of  labor 
cost  intended  to  bring  it  into  complete  harmony  with  the 
empirical  law  of  costs.  This  theory  is: 

"  it  is  always  the  amount  of  capital,  or  quantity  of  accumulated 
labour,  and  not  the  sum  of  accumulated  and  immediate  labour 
expended  on  production,  which  determines  the  exchangeable 
value  of  commodities."  * 

No  definition  is  given  of  "  accumulated  labor  "  other  than 
that  implied  in  the  sentence  above :  "  the  amount  of  capital, 
or  accumulated  labour."  Torrens  defines  capital  to  be  the 
raw-material,  machinery,  and  subsistence  of  labor  necessary 
to  production.  The  "  accumulated  labor  "  which  a  product 
costs  must  be,  in  his  view,  the  labor  *  which  its  raw-material 
costs,  plus  that  which  the  machinery  used  up  for  it  costs, 

1  Pp.  39-40.  See  also  Preface,  p.  7.  This  theory  does  not  occupy  a 
prominent  place  in  his  book.  The  sum  of  accumulated  and  immediate 
labor  is  what  Ricardo  considers  to  be  the  total  labor  cost  of  a  good — 
under  the  name  of  labor  indirectly  and  directly  applied. 

•Presumably,  in  its  turn,  "accumulated." 


335]         M'CULLOCH,  JAMES  MILL  AND  TORRENS  77 

plus — not  the  labor  actually  employed  on  it  in  connection 
with  this  machinery,  but  plus  the  labor  which  the  subsistence 
of  this  labor  has  cost! * 

Since  Torrens  himself  offers  no  explanation  why  this 
newly-defined  quantity  of  labor  cost  should  regulate  value, 
we  are  not  in  duty  bound  to  go  very  far  into  his  fantastic 
conception.  Just  as  labor  theorists  generally  proved  that 
labor  cost  is  the  regulator  of  value  by  the  simple  process  of 
showing  that  utility  is  not,  so,  I  suppose,  Torrens  shows 
that  labor  cost,  as  he  defines  it,  regulates  value  because  as 
defined  by  Ricardo  it  does  not.  An  astonishing  thing  about 
his  conception  is  that  the  labor  directly  applied  to  a  thing  is 
not  a  part  of  its  labor  cost!  To  the  money  outlay  of  the 
capitalist-entrepreneur  for  machinery  and  for  raw-material 
corresponds  the  labor  cost  of  these  goods.  To  the  money 
outlay  in  wages  must  correspond  either  the  labor  cost  directly 
remunerated  by  these  wages,  or  else  the  labor  cost  of  the 
things  the  laborers  buy  with  their  money  wages  (subsist- 
ence) .  Both  of  these  cannot  be  represented  by  these  wages, 
otherwise  some  labor  cost  would  be  counted  twice  over. 
For  instance,  the  labor  employed  directly  on  a  pair  of  shoes 
would  be  part  of  the  labor  cost  of  production  of  the  shoes; 
but  somewhere  else  it  would  be  counting  as  the  cost  of  pro- 
duction of  hats,  or  what  not,  according  to  the  employment 
of  the  laborer  of  whose  subsistence  these  shoes  became  a 
part.  Having  made  the  absurd  choice  to  count  this  labor 
(the  direct  labor  cost  of  the  shoes)  as  part  of  the  cost  of 
hats,  upon  the  general  principle  thus  adopted,  Torrens  can- 
not count  labor,  directly  applied,  as  part  of  the  cost  of  the 
thing  to  which  it  is  applied.  From  this  it  follows  that  the 
direct  labor  cost  of  a  machine  or  a  piece  of  raw-material 
cannot  be  counted  as  a  part  of  the  real  labor  cost  which  de- 

1  Explanation  of  this  follows  shortly. 


78  LABOR  THEORY  OF  VALUE         [336 

termines  its  value.  As  a  consequence,  it  is  interesting  to 
note  that  none  of  the  labor  directly  applied  to  a  commodity, 
or  directly  applied  to  any  production  goods  used  up  in  it, 
is  a  part  of  its  labor  cost.  If  Mr.  Torrens  had  been  pressed 
by  a  critic  in  his  day,  he  could  well  have  defied  any  man  to 
locate  the  Torrens  labor  cost  of  an  article  to  show  that  it 
does  not  correspond  to  the  value  of  the  article. 


CHAPTER  VII 

THE    EMPIRICAL   THEORY   AS    DEVELOPED    BY    MALTHUS. 

1.  MALTHUS  was  a  prolific  and  inconsistent  writer  on  the 
subject  of  value.1     His  statement  of  the  "  empirical "  laws 
of  value  was  able,  and  materially  advanced  the  theory  in 
English  political  economy,  but  when  he  comes  to  the  prob- 
lem of  the  measure  of  value,  as  a  part  of  what  we  call  the 
philosophical  account,  his  writings  are  of  so  little  worth  that 
it  would  be  a  waste  of  time  to  consider  them  in  full.     He 
was  a  great  temporizer  and  user  of  makeshifts  in  questions 
of  principle.    Malthus  denied  the  validity  of  Ricardo's  labor- 
cost  regulator,  but  defended  the  labor-command  measure, 
which  in  turn  Ricardo  rejected.     He  had  a  direct  corre- 
spondence controversy  with  the  latter  on  the  subject  of  these 
two  standards,  but  what  we  have  left  of  this  correspondence 
is  in  many  places  almost  unintelligible  to  a  modern  student, 
unless  read  with  infinite  care.2 

2.  In  his  Principles,   Malthus  opens  his  discussion  by 
drawing  the  established  distinction  between  value  in  use  and 
value  in  exchange;  but  immediately  after  this  he  makes  an 

JIn  his  Principles,  1st  ed.f  1820,  and  2d  ed.,  1836,  which  was  consid- 
erably altered  from  the  first.  The  Measure  of  Value  Stated  and  Illus- 
trated, a  pamphlet  of  1823,  and  the  Definitions  in  Political  Economy 
may  be  mentioned,  but  the  text  of  the  two  editions  of  the  Principles 
suffices  for  any  except  the  most  minute  investigation  of  his  views. 

'Ricardo's  part  is  contained  in  his  published  letters  to  Malthus,  as 
well  as  those  to  McCulloch  and  Trower,  but  the  letters  of  Malthus  to 
Ricardo  have  not,  to  my  knowledge,  been  found  for  publication,  except 
one  given  in  Letters  of  Ricardo  to  McCulloch,  (Pub.  Am.  EC.  Assn., 
10,  Nos.  5-6)  p.  161. 

337]  79 


80  LABOR  THEORY  OF  VALUE         [338 

important  alteration  in  the  order  of  presentation  of  ideas, 
as  followed  by  Smith  and  Ricardo.  He  begins  with  the 
"  empirical  "  account  of  value.  In  consequence,  when  he 
turns  to  the  question  of  the  relation  between  labor  cost  and 
value,  he  is  led  to  adjust  the  labor  theory  to  the  previously 
developed  empirical  theory.  As  pointed  out  in  the  intro- 
ductory chapter  of  this  essay,  this  was  the  beginning  of  the 
process  which  has  resulted  in  the  pushing  aside  of  the  labor 
theory  in  English  political  economy.  Ricardo  had  been  led, 
with  injurious  results,  to  adjust  the  "  empirical  "  to  the 
"  philosophical  "  account. 

In  a  history  of  the  law  of  supply  and  demand,  or  of  the 
law  of  entrepreneur's  costs,  the  statement  Malthus  gave 
these  principles  would  be  of  great  importance.1  Here  we 
are  concerned  with  his  version  of  these  principles  only  to 
the  extent  necessary  to  show  the  different  setting  they  give 
the  labor  theory  from  that  in  Ricardo's  work. 

3.  We  find  that  in  the  view  of  Malthus,  the  primary 
principle  of  exchange  value,  or  the  principle  of  broadest 
application,  is  the  law  of  supply  and  demand.  The  law  of 
entrepreneur's  costs  is  a  secondary  principle. 

"  It  has  never  been  a  matter  of  doubt  that  the  principle  of 
supply  and  demand  determines  exclusively,  and  very  regularly 
and  accurately,  the  prices  of  monopolized  commodities,  with- 
out any  reference  to  the  cost  of  their  production;  and  our 
daily  and  uniform  experience  shows  us  that  the  prices  of  raw 
products,  particularly  of  those  which  are  most  affected  by  the 
seasons,  are  at  the  moment  of  their  sale  determined  always 


law  of  supply  and  demand  is  not  so  simple  as  to  preclude  a 
variety  of  ways  of  stating  it,  and  the  meaning  of  such  conceptions  as 
intensity  of  demand,  equilibrium  or  balance  of  supply  and  demand,  etc., 
requires  careful  reasoning  to  define.  The  history  of  the  law  in  English 
political  economy  would  be  concerned  mainly  with  Malthus,  J.  S.  Mill, 
Cairnes  and  Marshall. 


339]    EMPIRICAL  THEORY  DEVELOPED  BY  MALTHUS    8l 

by  the  higgling  of  the  market,  and  differ  widely  in  different 
years  and  at  different  times,  while  the  labour  and  capital  em- 
ployed on  them  may  have  been  very  nearly  the  same."  * 

And  erven  in  those  competitive  manufactures  where  condi- 
tions are  most  favorable  to  the  law  of  costs,  alterations  of 
the  demand  and  supply  are  constantly  overcoming  the  influ- 
ence of  cost.  Therefore,  the  cost  rule  is  not  only  limited 
in  action,  but  it  is  directly  subordinate  to  the  rule  of  supply 
and  demand. 

"  The  cost  of  production  itself  only  influences  the  price  of 
*  *  commodities  as  the  payment  of  this  cost  is  the  necessary 
condition  of  their  continued  supply." 

"It  follows  that  the  great  principle  of  demand  and  supply 
is  called  into  action  to  determine  what  Adam  Smith  calls  na- 
tural prices  as  well  as  market  prices."  2 

Cost  of  production  "  can  do  nothing  but  in  subordination  " 
to  the  principle  of  supply  and  demand.3 

Malthtis  follows  Smith  precisely  in  naming  the  com- 
ponents of  entrepreneur's  costs — wages,  profits  and  rent — 
but  prefers  to  call  the  normal  value  requisite  to  cover,  these 
expenses,  instead  of  natural  price,  the  "necessary  price," 
"  because  the  term  necessary  better  expresses  a  reference  to 
the  conditions  of  supply."  *  What  he  means  by  the  state- 
ment that  the  relation  of  supply  to  demand  not  only  deter- 
mines temporary  market  prices  but  also  natural  prices  as 
defined  by  Adam  Smith,  is  that  wages  of  labor  depend  on  the 
supply  of  labor,  and  the  "profits"  of  capital  and  rent  of  land 

1  Principles,  1st  ed.,  pp.  73-4. 

*Ibid.,  74-5.  llbid.,  76. 

*Ibid.,  p.  83. 


82  LABOR  THEORY  OF  VALUE         [340 

in  the  same  way  on  the  supplies  of  these  agents.1  Ricardo 
took  an  entirely  different  view  of  the  relation  of  the  two 
"  empirical  "  principles.  In  his  work  he  takes  no  account 
of  the  law  of  supply  and  demand  until  in  Chapter  XXX, 
where  he  admits  that  this  rule  holds  good  of  monopolized 
commodities,  and,  indeed,  of  all  other  commodities  for  a 
limited  period.2  But,  in  a  letter  to  Malthus,  he  wrote: 

"You  say  that  deroand  and  supply  regulates  (sic)  value;  this 
I  think  is  saying  nothing;  it  is  supply  which  regulates  value, 
and  supply  is  itself  controlled  by  comparative  cost  of  pro- 
duction." 3 

Of  course  Ricardo  was  always  conscious  of  the  fact  that 
cost  of  production  can  influence  exchange  value  only  by 
way  of  influencing  supply.  At  the  very  outset  of  his  chap- 
ter on  value  in  his  Principles  he  states : 

"  There  are  some  commodities,  the  value  of  which  is  determined 
by  their  scarcity  alone.  No  labour  can  increase  the  quantity 

1  The  claim  regarding  the  subordination  of  the  law  of  costs  is  set  forth 
emphatically  as  follows:  "If  it  appears  generally  that  the  cost  of  pro- 
duction only  determines  the  prices  of  commodities,  as  the  payment  of  it 
is  the  necessary  condition  of  their  supply,  and  that  the  component  parts 
of  this  cost  are  themselves  determined  [*.  e.,  as  values]  by  the  same 
causes  which  determine  the  whole,  it  is  obvious  that  we  cannot  get  rid 
of  the  principle  of  demand  and  supply  by  referring  to  the  cost  of  pro- 
duction. Natural  and  necessary  prices  appear  to  be  regulated  by  this 
principle,  as  well  as  market  prices,  and  the  only  difference  is  that  the 
former  are  regulated  by  the  ordinary  and  average  relation  of  the  demand 
to  the  supply,  and  the  latter  when  they  differ  from  the  former  depend 
upon  the  extraordinary  and  accidental  relations  of  the  demand  to  the 
supply."  Principles,  ist  ed.,  pp.  84-85. 

'Conner  ed.,  p.  376. 

8  Letters  to  Malthus,  p.  176.  Malthus's  contrary  opinion  is  defended 
at  length  by  him  in  Sec.  n  of  Chap,  xi,  on  value,  in  the  Principles, 
ist  ed. 


241  ]    EMPIRICAL  THEORY  DEVELOPED  BY  MALTHUS    83 

of  such  goods,  and  therefore  their  value  cannot  be  lowered  by 
an  increased  supply."  l 

Ricardo's  view  was  virtually  this:  The  rule  of  supply  and 
demand  tells  us  practically  nothing1,  but  in  those  cases  where 
we  cannot  get  a  further  principle  we  will  let  it  count  as  a 
law  of  value.  But  wherever  the  law  of  labor  cost  applies, 
the  principle  of  supply  and  demand  ceases  to  be  of  im- 
portance. 

An  attempt  to  determine  whether  Ricardo  or  Malthus 
was  right  would  involve  us  immediately  in  a  discussion  of 
the  ultimate  relation  of  cost  in  all  ifs  forms  to  value,  which, 
so  far  as  we  do  enter  into  it,  we  hope  to  make  the  culmination 
of  this  essay.  Which  view  is  the  more  profound,  and  whether 
an  ambiguity  in  the  word  value  is  involved  in  the  contro- 
versy, are  questions  by  no  means  easy  to  answer. 

4.  With  this  general  theory,  that  the  empirical  law  of 
costs  is  "  subordinate  "  to  the  law  of  supply  and  demand,  as 
a  starting-point,  Malthus  proceeds  to  a  thorough  criticism 
of  Ricardo's  law  of  labor  cost.  In  the  indictment  which  he 
brings  against  this  principle,  we  may  for  ourselves  distin- 
guish seven  counts  (indicated  by  the  numbers  in  brackets). 
These  counts  really  fall  into  two  classes.  The  first  main 
contention  is  that  Ricardo  considers  the  relation  between 
entrepreneur's  cost  ("  necessary  price,"  as  Malthus  calls  it; 
"  natural  price,"  or  cost  in  "  labour  and  profits,"  as  Ricardo 
calls  it)  and  actual  market  values  too  intimate.  There  are 
three  sources  of  variation  of  actual  from  natural  prices 
which  should  be  emphasized.  There  are  [  i  ]  the  temporary 
market  alterations  of  prices,  too  rapid  to  be  met  by  chang- 
ing the  volume  of  production;  [2]  monopoly  in  the  product 
itself,  or  some  raw  product  used  in  its  making;  [3]  seasonal 
fluctuations  in  all  products  of  the  soil. 

1  Conner  ed.,  p.  6.  The  same  thought  is  expressed  in  the  first  para- 
graph of  Chapter  xiii,  p.  171. 


84  LABOR  THEORY  OF  VALUE  [342 

The  second  main  contention  1  is  that  Ricardo  overesti- 
mates the  degree  of  control  exercised  by  labor  cost  over 
natural  price.  Note  the  following  comprehensive  passage: 

"  Under  all  the  variations,  therefore,  which  arise  [4]  from 
the  different  proportions  of  fixed  capital  employed,  the  differ- 
ent quickness  of  the  returns  of  the  circulating  capital,  [5]  the 
quantity  of  foreign  commodities  used  in  manufactures,  [6] 
the  acknowledged  effects  of  taxation,  [7]  and  the  almost  uni- 
versal prevalence  of  rent  in  the  actual  state  of  all  improved 
countries,  we  must  I  think  allow  that  *  *  *  it  is  certainly 
not  the  quantity  of  labour  which  has  been  employed  in  the 
production  of  each  particular  commodity  which  determines 
their  relative  values  in  exchange  at  the  same  time  and  at 
the  same  place."  z 

The  claim  is  in  unequivocal  language  that  "  well-known 
causes  of  constant  and  universal  operation "  destroy  the 
proportionality  of  value  to  labor  cost. 

It  will  be  observed  that  the  four  points  made  in  this  cita- 
tion all  concern  influences  which  make  the  entrepreneur's 
expenses  of  production  out  of  proportion  to  the  total  quan- 
tity of  labor  which  his  outlay  of  money  directly  and  in- 
directly remunerates.  For  instance,  the  fifth  point  regard- 
ing the  use  of  imported  raw-material  or  machinery  refers  to 
the  fact  that  $1,000  worth  of  production  goods  bought 
abroad  by  an  entrepreneur  may  have  cost  more  or  less  labor 
than  $1,000  worth  of  raw-material  of  home  production.  As 
Ricardo  himself  points  out  (in  Chapter  VII  of  his  Prin- 
ciples') ,  the  exchange  value  of  an  imported  commodity  does 

1The  case  is  not  presented  by  Malthus  as  one  of  two  main  arguments 
with  seven  counts  in  total,  but  all  except  this  division  and  the  number- 
ing are  his. 

*ist  ed.,  pp.  104-5.  This  passage  happens  not  to  reappear  in  the  2d 
ed.,  but  all  the  points  in  it  are  still  maintained  there. 


343]    EMPIRICAL  THEORY  DEVELOPED  BY  MALTHUS    85 

not  depend  on  its  labor  cost  abroad  compared  with  the  home 
labor  cost  of  the  goods  against  which  it  exchanges.  But 
the  $1,000  spent  by  one  entrepreneur  counts  just  the  same 
as  that  spent  by  another  in  determining  the  "  necessary 
price  "  of  the  respective  commodities  which  they  produce. 
Thus  there  is  here  one  source  of  disproportionality  between 
necessary  prices  and  actual  labor  costs. 

5.  What  is  the  position  of  Ricardo  with  respect  to  these 
seven  counts  ?  He  acknowledged  all  but  the  claim  that  rent 
causes  an  aberration  of  normal  value  from  the  position  re- 
quired by  labor  cost.  That  is,  in  the  language  of  the  day 
he  denied  that  "  rait  enters  into  price."  He  not  only 
acknowledged,  but  himself  stated  the  other  points.  How 
fully  he  treats  the  question  of  the  different  proportions  of 
"  fixed  and  circulating  "  capital,  we  have  seen.1  As  for  the 
"  acknowledged  "  effects  of  taxation,  the  reference  is  to 
Ricardo's  own  statements,  scattered  throughout  his  various 
chapters  on  taxation,  that  this  and  that  tax  will  raise  prices. 
Ricardo  was  perfectly  aware  of  the  effects  of  monopoly,  and 
of  the  influence  of  temporary  oscillations  of  supply  and 
demand.2 

'As  Malthus  said  in  another  place,  "The  effects  of  slow  or  quick  re- 
turns, and  of  the  different  proportions  of  fixed  and  circulating  capitals, 
are  distinctly  allowed  by  Mr.  Ricardo,  but  in  his  last  edition  he  has 
much  underrated  their  amount.  They  are  both  theoretically  and  prac- 
tically so  considerable  as  entirely  to  destroy  the  position  that  commodi- 
ties exchange  with  each  other  according  to  the  quantity  of  labour  which 
has  been  employed  upon  them,  but  no  one  that  I  am  aware  of  has  ever 
stated  that  the  different  quantity  of  labour  employed  on  commodities  is 
not  a  much  more  powerful  source  of  difference  of  value."  Measure 
of  Value  Stated  and  Illustrated,  pp.  12-13. 

*We  have  not  happened  upon  a  passage  by  Ricardo  referring  to 
the  third  count,  respecting  good  and  bad  crops,  but  Ricardo  would 
undoubtedly  have  considered  that  it  did  not  invalidate  his  position. 
If  agricultural  capital  and  labor  remain  the  same  in  quantity  while 
good  and  bad  crops  alternate,  the  cost  of  production  per  unit  of  crop 
varies  as  well  as  the  price.  When  the  wheat  crop  is  good  the  cost  per 


86  LABOR  THEORY  OF  VALUE         [344 

The  old  question  whether  "  rent  enters  into  price  "  could 
very  properly  be  discussed  in  a  history  of  the  labor  theory 
of  %value.  Since,  however,  the  question  is  large  enough  to 
warrant  separate  discussion,  and  has  in  recent  times  re- 
ceived it  in  many  prominent  places,  we  shall  be  content 
merely  to  point  out  the  conflict  between  Malthus  and 
Ricardo,  and  to  take  the  stand  that  recent  discussion 
has  shown  that  ground  rent  enters  into  price  in  the  same 
sense  as  wages,  or  interest  on  capital  other  than  land. 
Ricardo  said  rent  does  not  and  cannot  enter  in  the  least  de- 
gree into  price.  Says  Malthus: 

"  It  appears  to  me  essential,  both  to  correctness  of  language 
and  correctness  of  meaning  to  say  that  the  cost  of  producing 
any  commodity  is  made  up  of  all  the  wages,  all  the  profits, 
and  all  the  rent  which  *  *  are  necessary  to  bring  that  par- 
ticular commodity  to  market  in  the  quantity  required."  1 

6.  We  have  here  the  remarkable  instance  of  two  writers 
nearly  agreed  on  the  number  of  exceptions  to  a  principle, 
but  quite  disagreed  as  to  what  remains  of  the  principle. 
The  labor  cost  of  a  commodity  in  a  modern  market  can  in- 
fluence its  exchange  value  only  by  means  of  influencing  its 
entrepreneur's  cost.  Thus  any  cause  which  weakens  the 
connection  between  the  value  of  a  commodity  and  its  entre- 
preneur's cost  of  production,  thereby  also  weakens  its  con- 
nection with  labor  cost.  Therefore,  the  first  three  points 
made  by  Malthus  to  show  that  entrepreneur's  costs  do  not  ex- 
ercise perfect  control  over  actual  market-values  are  relevant 

bushel  is  low.  The  price  per  bushel  would  also  be  low.  If  good  crops 
mean  low  cost  and  low  value  at  the  same  time,  they  probably  do  not 
mean  sinking  of  value  and  cost  in  the  same  degree.  The  consequent 
deviation  of  value  from  cost  is  probably  what  Malthus  had  in  mind. 

Jist  ed.,  pp.  102-3. 


345]    EMPIRICAL  THEORY  DEVELOPED  BY  MALTHUS    87 

to  the  dispute  about  the  labor-cost  regulator.  But,  as  the 
reader  has  observed,  the  three  exceptions  to  the  law  of  money 
costs  are  only  such  as  have  always  been  made  to  any  propo- 
sition of  static  theory.  A  static  law  of  value  is  supposed 
only  to  govern  normal  value  under  competitive  conditions. 
It  is  perfectly  legitimate  to  put  emphasis  upon  the  causes  of 
the  variation  of  actual  values  from  static  standards,  but  on 
the  principle,  now  so  well  understood,  that  actual  conditions 
can  be  fully  understood  only  by  the  preliminary  establish- 
ment of  static  laws,  the  first  three  points  of  criticism  made 
by  Malthus,  and  admitted  by  Ricardo,  must  be  judged  to 
leave  the  law  of  costs  a  perfectly  valid  principle. 

If  the  only  causes  of  variation  of  actual  exchange  values 
from  the  standard  of  labor  costs  were  those  causes  which 
operate  to  weaken  the  law  of  entrepreneur's  costs,  the  Ricar- 
dian  labor  theory  would  remain  a  principle  of  the  utmost 
importance.  The  attacks  which  the  labor-cost  theory  can- 
not withstand  are  those  directed  against  its  validity  as  a  static 
principle.  It  is  an  undisputed  static  principle  that  ex- 
change values  are  in  proportion  to  entrepreneur's  costs. 
Therefore,  every  time  a  cause  is  shown  which  throws  en- 
trepreneur's costs  out  of  proportion  to  labor  cost,  a  heart- 
thrust  is  given  the  theory  of  the  labor-cost  regulator.  To 
the  list  of  causes  of  this  kind  granted  by  Ricardo,  Malthus 
added  one,  an  important  one;  or  rather,  he  persisted  in  re- 
taining what  Adam  Smith  considered  to  be  such  a  cause — 
rent  of  land.  Malthus  then  discovered  no  new  point;  but 
he  marshaled  many  points  in  an  able  manner.  Considering 
only  the  weighty  part  of  his  case,  his  argument  is  that  en- 
trepreneur's costs  consist  of  wages,  interest,  and  rent;  that 
wages  alone  stand  for  labor  cost ;  *  that  therefore  the  exist- 

1  The  strange  attempt  of  James  Mill  to  show  that  the  interest  element 
stands  for  labor  also,  mistook,  as  we  showed  in  Chapter  vi,  the  replace- 
ment fund  of  an  entrepreneur  for  his  interest  fund. 


88  LABOR  THEORY  OF  VALUE         [346 

ence  of  the  other  two  elements  makes  the  total  entrepreneur's 
cost  decidedly  out  of  proportion  to  labor  cost.  This  signi- 
fies not  only  that  entrepreneur's  costs  are  composed  of  out- 
lays in  excess  of  payments  for  labor,  but  that  when  one  en- 
trepreneur's cost  is  compared  with  that  of  another  the  two 
will  (barring  an  accidental  coincidence)  not  be  to  each  other 
as  the  respective  labor  costs  entering  into  them  (through 
wages).  Two  commodities  may  have  equal  exchange 
values  and  equal  entrepreneur's  costs,  but  one  may  cost  twice 
as  much  labor  as  the  other,  because  the  latter  may  cost  more 
rent  or  interest  than  the  former.  Ricardo  denied  the  influ- 
ence of  rent,  and  assumed  that  interest  preserves  fairly  con- 
stant proportions  with  the  wage  element.  In  our  judgment, 
Ricardo  was  much  the  profounder  of  these  two  econo- 
mists, but  Malthus  made  the  fortunate  gain  of  presenting 
the  empirical  principles  of  value  at  the  outset  of  his  work, 
and  in  this  way  was  led  to  adjust  the  labor  theory  to  them, 
instead  of  doing  the  reverse,  as  Ricardo  did. 

Note  on  the  Question  of  the  Invariable  Measure  of  Value  in  all 

Times  and  Places. 

7.  Adam  Smith  made  several  general  assertions  concern- 
ing the  power  of  a  labor  standard  to  measure  value  in  all 
times  and  places.  If  mankind  should  live  under  conditions 
free  from  the  rent  of  land  and  interest  on  capital,  according 
>to  Smith  the  quantity  of  labor  which  commodities  cost  might 
properly  be  regarded  as  commensurate  with  the  quantity  which 
they  command  in  exchange.  Under  actual  conditions  the 
command  standard  alone  will  apply.  Ricardo  became  a  stead- 
fast critic  of  the  idea  that  the  labor-command  standard  could 
be  thus  used.  He  believed  it  to  be  impossible  to  find 
an  invariable  measure  based  on  labor  cost  of  production 
(as  distinguished  from  labor  commanded  in  exchange)  ;  but  he 
made  statements  which  implied  that  if  a  commodity  existed 
which  cost  the  same  quantity  of  labor  throughout  time,  it  would 


347]    EMPIRICAL  THEORY  DEVELOPED  BY  MALTHUS    89 

be  an  invariable  measure  of  "  real  value."  Then  again  he 
faltered  in  this  view  because  "  profits  "  enter  into  the  cost  of 
production  of  different  articles  in  different  degrees.  The  writer 
has  found  himself  unable  to  reach  a  complete  understanding 
of  Ricardo's  section  on  this  subject,  Section  vi  of  Chapter  I. 
Malthus  always  defended  the  labor-command  standard  of 
Smith,  though  in  a  vacillating  way.  In  the  end  he  adopted  it 
in  an  unqualified  form.  (In  the  2d  and  last  edition  of  his 
Principles,  the  text  being  written  just  before  his  death.)  With 
his  last  published  discussion,  appearing  in  1836,  the  question 
practically  disappeared  from  English  political  economy.  Re- 
ferring to  this  question,  John  Stuart  Mill  said :  "it  is  necessary 


involved  in  distracting  confusion,  while  the  comparatively  brief 
passage  Smith  devoted  to  the  subject  contains  fatal  contra- 
dictions. 

It  is  doubtful  if  we  can  escape  this  question  in  theory.  The 
required  standard  may  come  as  a  more  modest  proposal  than 
that  of  Adam  Smith,  but  some  means  of  comparing  value,  as 
significance  (as  Menger's  "Bedeutung")  in  different  times  will 
always  be  desirable,  to  say  the  least.  In  the  recent  controversy 
over  the  question  whether  gold  is  a  good  standard  of  de- 

'In  his  notes  in  a  French  edition  of  Ricardo's  Principles,  "  Des 
Principes  de  V  Economic  Politique  et  de  I'lmpdt,"  2d  ed.  Paris  (1835), 
note,  p.  12. 

1  Essay  on  the  Production  of  Wealth,  p.  65. 


88  LABOR  THEORY  OF  VALUE          [346 

ence  of  the  other  two  elements  makes  the  total  entrepreneur's 
cost  decidedly  out  of  proportion  to  labor  cost.  This  signi- 
fies not  only  that  entrepreneur's  costs  are  composed  of  out- 
lays in  excess  of  payments  for  labor,  but  that  when  one  en- 
trepreneur's cost  is  compared  with  that  of  another  the  two 
will  (barring  an  accidental  coincidence)  not  be  to  each  other 
as  the  respective  labor  costs  entering  into  them  (through 
wages).  Two  commodities  may  have  equal  exchange 
values  and  equal  entrepreneur's  costs,  but  one  may  cost  twice 
as  much  labor  as  the  other,  because  the  latter  may  cost  more 
rent  or  interest  than  the  former.  Ricardo  denied  the  influ- 


ERRATA. 

P.  89.     3d  line  from  bottom.     Insert  "  in  "  before  "  different  times." 
P.  92.     6th  and  7th  lines  from  top.     For  "  intrinsic  "  read  "  extrinsic." 


ing  the  power  of  a  labor  standard  to  measure  value  in  all 
times  and  places.  If  mankind  should  live  under  conditions 
free  from  the  rent  of  land  and  interest  on  capital,  according 
'to  Smith  the  quantity  of  labor  which  commodities  cost  might 
properly  be  regarded  as  commensurate  with  the  quantity  which 
they  command  in  exchange.  Under  actual  conditions  the 
command  standard  alone  will  apply.  Ricardo  became  a  stead- 
fast critic  of  the  idea  that  the  labor-command  standard  could 
be  thus  used.  He  believed  it  to  be  impossible  to  find 
an  invariable  measure  based  on  labor  cost  of  production 
(as  distinguished  from  labor  commanded  in  exchange)  ;  but  he 
made  statements  which  implied  that  if  a  commodity  existed 
which  cost  the  same  quantity  of  labor  throughout  time,  it  would 


347]    EMPIRICAL  THEORY  DEVELOPED  BY  MALTHUS    89 

be  an  invariable  measure  of  "  real  value."  Then  again  he 
faltered  in  this  view  because  "  profits  "  enter  into  the  cost  of 
production  of  different  articles  in  different  degrees.  The  writer 
has  found  himself  unable  to  reach  a  complete  understanding 
of  Ricardo's  section  on  this  subject,  Section  vi  of  Chapter  I. 
Malthus  always  defended  the  labor-command  standard  of 
Smith,  though  in  a  vacillating  way.  In  the  end  he  adopted  it 
in  an  unqualified  form.  (In  the  2d  and  last  edition  of  his 
Principles,  the  text  being  written  just  before  his  death.)  With 
his  last  published  discussion,  appearing  in  1836,  the  question 
practically  disappeared  from  English  political  economy.  Re- 
ferring to  this  question,  John  Stuart  Mill  said :  "it  is  necessary 
to  touch  upon  the  subject,  if  only  to  show  how  little  there  is 
to  be  said  about  it,"  and  concludes  that  the  measure  sought  is 
impossible.  J.  B.  Say  wrote  that  "  an  invariable  measure  of 
value  is  a  pure  Chimera."  l  Torrens  expressed  his  judg- 
ment in  words  quoted  from  Lord  Lauderdale :  "  Lord  Lauder- 
dale  has  justly  observed  that  the  search  of  economists  after 
a  measure  of  exchangeable  value,  is  just  as  irrational  and 
as  hopeless  as  was  that  of  the  alchemists  in  quest  of  the 
philosopher's  stone." 2  Well  might  the  discussion  be  condemned 
by  contemporaries  and  neglected  by  subsequent  economists,  for, 
especially  in  the  lengthy  writings  of  Malthus,  the  question  was 
involved  in  distracting  confusion,  while  the  comparatively  brief 
passage  Smith  devoted  to  the  subject  contains  fatal  contra- 
dictions. 

It  is  doubtful  if  we  can  escape  this  question  in  theory.  The 
required  standard  may  come  as  a  more  modest  proposal  than 
that  of  Adam  Smith,  but  some  means  of  comparing  value,  as 
significance  (as  Menger's  "Bedeutung")  in  different  times  will 
always  be  desirable,  to  say  the  least.  In  the  recent  controversy 
over  the  question  whether  gold  is  a  good  standard  of  de- 

*In  his  notes  in  a  French  edition  of  Ricardo's  Principles,  "  Des 
Principes  de  V  Economic  Politique  et  de  I'lmpdt,"  2d  ed.  Paris  (1835), 
note,  p.  12. 

1  Essay  on  the  Production  of  Wealth,  p.  65. . 


po  LABOR  THEORY  OF  VALUE         [34g 

f erred  payments,  practical  men  decided  for  gold  on  other  (and 
sufficient)  grounds  than  any  alleged  invariability  in  value,  but 
it  was  inevitable  that  the  question  should  suggest  itself: 
What  does  constitute  the  same  value  in  different  times  (i.  e. 
under  changed  conditions  of  wealth)  ?  It  is  the  legitimate 
function  of  economic  theory  to  wrestle  with  such  questions, 
whether  to  conclude  that  an  answer  is  impossible  (for  that 
would  be  a  conclusion,  hard  to  prove  and  of  importance  when- 
proved)  or  that  such  and  such  a  standard  may  be  established. 
The  present  essay  will  not  attempt  the  herculean  dialectical 
labor  of  setting  in  order  and  criticising  all  that  Smith,  Malthus,, 
and  Ricardo  wrote  on  this  subject.  The  labor  doctrine  as  a 
statical  theory  is  a  problem  of  sufficient  proportions  in  itself 
to  permit  specializing  upon  it.  A  brief  discussion  however 
is  added  concerning  what  Malthus  wrote  upon  the  subject  of 
the  labor-command  measure.  In  the  first  edition  of  his  Prin- 
ciples, Malthus  held  that  there  is  no  question  of  possessing 
a  perfect  measure  of  value  at  different  times,  but  there  is  a 
question  of  choice  between  various  imperfect  measures.  He 
was  apparently  much  impressed  by  the  charge  that  the  value  of 
labor  changes  when  the  quantity  of  commodity  (i.  e.  measured 
in  physical  units)  which  it  commands,  is  altered.  Accord- 
ingly he  proposes  to  take  labor  and  "corn"  together,  or  a 
"  mean  between  them "  as  a  standard.1  He  proceeds 
upon  the  supposition  that  "  when  corn  compared  with  labour 
is  dear,  labour  compared  with  corn  must  necessarily  be 
cheap.  "At  the  period  when  a  given  quantity  of  corn  will 
command  the  greatest  quantity  of  the  necessaries,  conveniences, 
and  amusements  of  life,  a  given  quantity  of  labour  will  always 
command  the  smallest  quantity  of  such  objects,  (and  vice 
versa)  ;  *  *  *  If,  then,  we  take  a  mean  between  the 
two,  we  shall  evidently  have  a  measure  corrected  by  the 
contemporary  variations  of  each  in  opposite  directions."  * 

'The  principle  of  this  choice  had  very  little  in  common  with  the  prin- 
ciple of  the  various  "multiple  standards  of  value"  since  proposed. 
*ist  ed.,  pp.  128-9. 


349]    EMPIRICAL  THEORY  DEVELOPED  BY  MALTHUS    gi 

In  this  double  standard  a  unit  of  labor  is  to  be  a  day 
of  "  common "  labor.  For  the  use  of  the  standard  some 
unit  of  corn  is  necessary.  A  peck  is  selected.  The  reason 
given  for  this  choice  is  that  this  amount  may  be  considered 
"  in  respect  to  quantity  as  equivalent  to  a  day's  labour." 
Accordingly,  "  any  commodity,  which  at  different  periods  will 
purchase  the  same  number  of  days'  labour  and  of  pecks  of 
wheat,  or  parts  of  them,  each  taken  in  equal  proportions,  may 
be  considered,  upon  this  principle,  as  commanding  pretty  nearly 
the  same  quantity  of  the  necessaries,  conveniences,  and  amuse- 
ments of  life;  and,  consequently,  as  preserving  pretty  nearly 
its  real  value  in  exchange  at  different  periods."  1  In  his 
correspondence  with  Malthus,  Ricardo  made  the  former 
very  uncomfortable  in  the  position  taken  with  respect  to  the 
combined  labor-corn  measure  of  value.  In  the  second  edi- 
tion of  the  Principles  of  Malthus  this  hybrid  standard  was 
abandoned.  In  principle  it  was  a  shallow  makeshift.  It  is 
needless  to  say  that  if  the  arguments  for  regarding  the  amount 
of  commodities  purchaseable  by  a  day's  wages,  as  the  unit 
of  wealth,  are  sufficient,  grain  should  be  measured  in  its  "  real 
value  "  by  reference  to  this  standard  in  the  same  way  as  any 
other  important  commodity.  As  was  stated  in  Chapter  ii,  the 
corn  measure  of  value  was  suggested  by  Smith  to  serve  as  a 
convenient  index  to  the  labor  measure.  Beyond  a  doubt,  Smith 
spoke  of  the  corn  measure  in  a  way  to  mislead  both  Ricardo 
and  Malthus ;  but  nothing  could  be  plainer  than  the  words 
quoted  from  him  to  show  that  corn  is  used  on  principle  only 
because  it  is  supposed  to  remain  from  age  to  age  in  a  steady 
exchange  ratio  with  day  labor.2 

In  Malthus's  second  edition,  the  view  is  taken  simply  that 
"  standard  "  labor  commanded  in  exchange  is  the  measure  of 
value  in  all  times  and  places.  There  is  great  difficulty  in  tell- 
ing precisely  what  value,  or  what  kind  of  value,  it  is  that  is 
measured.  It  is  called  "  real  value  in  exchange  "  and  "  in- 

'ist  ed.,  p.  129.  "See  ante,  p.  27,  n. 


92  LABOR  THEORY  OF  VALUE          [350 

trinsic  value  in  exchange."  The  latter  is  in  one  place  defined 
to  be  "  not  the  general  power  of  purchasing  possessed  by  a 
particular  commodity,  but  its  power  of  purchasing  arising  from 
intrinsic  causes,  which  includes  all  the  causes  of  whatever 
kind  they  may  be,  which  have  contributed  to  the  limita- 
tion of  its  supply  compared  with  the  demand."  x  The  ex- 
trinsic causes  of  a  commodity's  exchange  value  are  the 
causes  of  the  value  of  the  other  commodity  in  whose 
quantity  the  exchange  value  of  the  first  is  expressed.2  In 
various  other  places,  "  intrinsic  value  in  exchange "  is  de- 
fined as  indicating  ( i )  the  degree  of  necessity  or  convenience  to 
life  (ist  ed.)  ;  (2)  the  difficulty  of  obtainment  (in  some  sense 
supposed  to  be  more  inclusive  than  Ricardo's  labor  cost)  ; 
(3)  the  degree  of  the  limitation  of  the  supply  as  compared 
with  the  demand.  Thinking  with  such  terminology  would  be 
like  painting  portraits  with  a  white-wash  brush.  If  a  day  of 
labor  in  America  commanded  twice  the  physical  quantity  of 
a  given  complex  of  commodities  that  a  day  of  English  labor 
commanded,  Malthus  was  forced  to  admit  that  the  simple  ex- 
change value  of  the  goods  commanded  by  a  unit  of  American 
labor  was  twice  that  commanded  by  a  unit  of  British  labor. 
But  at  the  same  time  his  doctrine  of  the  labor  measure  of  value 
required  him  to  affirm  that  the  "  real  exchange  value  "  of  the 
goods  commanded  by  a  day  of  labor  in  the  two  countries  was 
the  same.  In  this  way  he  was  led  to  contend  that  two  com- 
plexes of  goods  having  different  exchange  values,  had  the 
same  "  real  exchange  values."  In  view  of  the  fact  that  "  real 
exchange  value  "  is  defined  virtually  as  "  exchange  value  as 
arising  from  its  causes,"  the  contention  is  mystifying.  One 
is  prone  to  acquiesce  in  J.  S.  Mill's  judgment  that  the  argu- 
ment of  Malthus  is  a  "  vain  subtlety." 

^dcd.,  p.  96.  *2ded.,p.  57. 


CHAPTER  VIII 

SENIOR 

i.  SENIOR'S  little  Political  Economy  1  earned  for  him 
but  a  secondary  rank  in  the  literary  history  of  the  science. 
This  is  because  the  work,  taken  as  a  whole,  is  extremely 
unsystematic.  It  is  also  a  little  erratic.  Senior  was,  how- 
ever, a  man  of  far  greater  merit  than  McCulloch,  Torrens, 
or  James  Mill,  and  advanced  many  significant  original  doc- 
trines, or  rather  parts  of  doctrines.  The  most  noteworthy 
of  these  bear  closely  upon  the  theory  of  value;  and  if  we  put 
together  what  he  said,  in  our  own  way,  we  shall  obtain  an 
important  line  of  commentary  upon  the  Ricardian  labor-cost 
theory.  The  results  tend  more  to  destroy  than  to  support 
that  theory.2 

According  to  Senior,  the  conditions  essential  to  value, 
which  he  defines  as  exchange  value,  are  (i)  utility,  (2) 
limitation  in  supply,  (3)  transferableness.3  We  have  seen 

'Prepared  as  the  article  on  "Political  Economy"  in  the  Encyclopaedia 
Metropolitana,  1836,  but  appearing  as  a  separate  work  in  numerous  re- 
prints from  this.  Page  references  are  good  for  any  edition.  The  table 
of  contents  looks  systematic  at  first  blush,  but  study  of  the  text,  espe- 
cially the  part  on  the  theory  of  distribution,  soon  dispels  any  illusions 
concerning  this  point. 

*  Senior  was,  in  my  judgment,  indebted  fully  as  much  to  Malthus  and 
Say  as  to  Ricardo.  To  all  appearances  much  of  interest  in  the  writings 
of  Cairnes  must  have  been  suggested  by  the  work  of  Senior. 

8  Political  Economy,  p.  6.  These  are  the  three  constituents  of  wealth, 
but  things  composing  wealth  are  defined  to  be  the  same  as  things  of  value. 
Curiously  the  qualification  of  transferableness  is  held  not  to  exclude  per- 
3Si]  93 


94  LABOR  THEORY  OF  VALUE         [352 

how  Malthus  laid  emphasis  on  the  fact  that  cost  can  influ- 
ence value  only  through  affecting  supply,  and  here  we  see 
the  same  thought  put  even  more  emphatically.  It  is  limita- 
tion of  supply  alone  that  in  the  first  instance  gives  value  to 
things  of  a  useful  nature.  The  following  words,  carrying 
out  the  lines  of  thought  suggested  by  J.  B.  Say  and  Mal- 
thus, are  remarkable: 

"  It  is  true  that  wherever  there  is  utility,  the  addition  of  labor 
as  necessary  to  production  constitutes  value,  because,  the  supply 
of  labor  being  limited,  it  follows  that  the  object  to  the  supply 
of  which  it  is  necessary,  is  by  that  very  necessity  limited  in 
supply.  But  any  other  cause  limiting  supply  is  just  as  effi- 
cient a  cause  of  value  in  an  article  as  the  necessity  of  labor 
to  its  production.  And  in  fact,  if  all  the  commodities  used  by 
man  were  supplied  by  nature  without  any  intervention  whatever 
of  human  labor,  but  were  supplied  in  precisely  the  same  quan- 
tities as  they  now  are,  there  is  no  reason  to  suppose  either 
that  they  would  cease  to  be  valuable,  or  would  exchange  in 
any  other  than  their  present  proportions."  * 

Senior  adopts  this  last  heroic  hypothesis  only  in  passing, 
by  way  of  exhibiting,  in  a  striking  way,  what  he  considers 
to  be  the  true  relation  of  labor  cost  to  value.  In  criticism 
of  Ricardo,  he  says : 

"As  limitation  of  supply  is  essential  to  the  value  of  labor 
itself,  to  assume  labor  and  exclude  limitation  of  supply,  as  the 
condition  on  which  value  depends  is  not  only  to  substitute  a 
partial  for  a  general  cause,  but  pointedly  to  exclude  the  very 
cause  which  gives  force  to  the  cause  assigned." 

sonal  talents  from  the  category  of  wealth,  for  these  are  considered  to  be 
things  "imperfectly  transferable."  A  lawyer  transfers  his  talents  to  me 
when  I  hire  him  to  plead  my  case.  See  pp.  9-10. 

1  P.  24.  A  similar  passage,  not  so  well  expressed, is  found  in  Malthus, 
Principles,  ist  ed.,  p.  74. 


.353]  SENIOR  95 

2.  Although  Senior  is  careful  to  give  limitation  of  supply 
as  the  factor  which,  combined  with  usefulness,  occasions 
value,  he  still  holds  that  cost  of  production  may  govern  value 
under  certain  ideal  conditions.  These  conditions  are  de- 
scribed as  those  of  "  perfect  competition,"  but  he  means  a 
great  deal  more  by  this  than  these  words  signify  to-day. 
Senior's  conception  of  cost,  however,  is  different  from 
Ricardo's.  "  By  cost  of  production  we  mean  the  sum  of 
labour  and  abstinence  necessary  to  production."  *  Labor 
is  defined,  with  especial  reference  to  cutting  off  the  exten- 
sion of  the  term  attempted  by  McCulloch,2  to  be  "  volun- 
tary exertion  of  bodily  or  mental  faculties  for  the  purposes 
of  production"  (p.  57).  The  new  word  abstinence  is  de- 
fined as  follows : 

"A  term  by  which  we  express  the  conduct  of  a  person  who 
either  abstains  from  the  unproductive  use  of  what  he  can 
command,  or  designedly  prefers  the  production  of  remote  to 
that  of  immediate  results."  8 

For  the  variety  of  conceptions  of  cost,  expressed  and  im- 
plied in  the  writings  of  his  predecessors,  Senior  substitutes 
a  consistent  definition  of  cost  in  terms  of  subjective  sacri- 
fice. With  this  improved  concept  as  an  aid,  he  is  enabled 
to  resolve  many  of  the  difficulties  which  had  beset  earlier 
debates  upon  the  meaning  of  cost.  The  objection  of  Mr. 
Torrens  to  the  inclusion  by  Mr.  Malthus  of  "  profits  "  in 
cost  is  good,  says  Senior,  as  against  Mr.  Malthus's  word 
profits. 

»P.  101. 

J  See  ante,  chap,  vi,  \  2. 

3 P.  58.  Scrope,  an  English  writer,  1833,  said:  "Profit  is  to  be 
viewed  in  the  light  of  a  compensation  for  abstaining  for  a  time  from 
consumption  in  personal  gratification."  Mentioned  by  Bohm-Bawerk, 
Capital  and  Interest,  p.  271.  "But,"  continues  Bohm-Bawerk,  "this 
same  idea  which  his  predecessors  merely  touched  on,  Senior  has  made 
the  center  of  a  well-constructed  theory  of  interest." 


96  LABOR  THEORY  OF  VALUE  [354 

"  Want  of  the  term  abstinence,  or  of  some  equivalent  expres- 
sion has  led  Mr.  Malthus  into  inaccuracy  of  language.  *  * 
When  he  termed  profit  a  part  of  the  cost  of  production,  he  ap- 
pears to  us  to  have  meant  not  profit,  but  that  conduct  which  is 
repaid  by  profit:  an  inaccuracy  precisely  similar  to  that  com- 
mitted by  those  who  term  wages  a  part  of  the  cost  of  produc- 
tion ;  meaning  not  wages,  which  are  the  result,  but  the  labour 
for  which  wages  are  the  remuneration."  * 

The  clearness  of  thought  here  is  gratifying  in  comparison 
with  earlier  discussions,  but,  as  we  have  had  occasion  to 
urge  before,  the  idea  that  it  is  erroneous  to  consider  wages 
and  profits  as  cost,  confines  the  term  to  the  meaning  of  sub- 
jective cost  whereas  there  can  well  be  other  forms  of  cost. 
It  may  cost  coal  and  machinery  to  produce  an  article,  just  as 
it  may  cost  labor  and  abstinence. 

3.  The  true  cost  of  production  of  commodities,  affirms 
Senior,  would  regulate  their  values  if  the  only  obstacles  to 
their  supply  were  the  labor  and  abstinence  required  for  their 
production.  There  are  two  different  arguments  given  to 
substantiate  this  proposition.  The  first  partially  corre- 
sponds to  the  "  philosophical "  account  of  value,  being 
stated  in  highly  generalized  terms  without  regard  to  the 
division  of  society  into  classes  of  capitalists  and  laborers. 

"  Where  the  only  natural  agents  employed  are  those  which 
are  universally  accessible,  and  therefore  are  practically  un- 
limited in  supply,  the  utility  of  the  produce,  or  in  other  words, 
its  power  of  producing  gratification,  or  preventing  pain,  must 
be  in  proportion  to  the  sacrifices  made  to  produce  it,  unless  the 
producer  has  misapplied  his  exertions :  Since  no  man  would 
willingly  employ  a  given  amount  of  labor  or  abstinence  in  pro- 
ducing one  commodity,  if  he  could  obtain  more  gratification 
by  devoting  them  to  the  production  of  another."  2 

JP.  100.  'P.  97- 


355]  SENIOR  97 

This  passage,  whether  consciously  or  unconsciously,  is  3 
proposition  about  a  primitive  or  a  Robinson  Crusoe  econ- 
omy. It  affirms  that  the  utility  of  products  will  be  in  pro- 
portion to  their  total  disutility  costs  of  production,  but  it 
does  not  affirm  that  production  will  be  carried  on  until  the" 
utility  per  unit  of  the  increasing  number  of  products  will  be 
reduced  until  it  is  equal  to  the  disutility  cost  of  a  unit.  Ex- 
cept for  the  failure  to  make  this  latter  observation,  Senior's 
formula  looks  like  an  anticipation  of  later  theories  of  value. 
This  appearance  is  carried  out  by  the  use  of  the  word 
"  utility  "  for  value.  The  word  as  here  used  was  prob- 
ably taken  directly  from  Say;  it  cannot  be  Adam  Smith's 
"value  in  use."  For  if  Crusoe  produced  at  equal  cost, 
measured  in  disutility,  a  small  article  of  luxury  and  a 
great  quantity  of  necessaries,  and  estimated  the  two  at  the 
same  value — and  this  would  be  normal — the  Smithian  values 
in  use  distinctly  would  not  be  in  proportion  to  sacrifice  costs. 
The  great  quantity  of  necessaries  would  have  a  great  "value 
in  use,"  as  contrasted  with  the  small  article  of  luxury,  for 
which  Crusoe  nevertheless  was  willing  to  expend  quite  as 
much  labor.  "  Marginal  "  or  "  final  "  utility  would  fit  the 
requirements  of  this  formula,  but  there  is  nowhere  in  the 
book  the  slightest  evidence  that  Senior  utilizes  the  marginal 
method.  In  fact,  on  the  same  page  with  this  proposition  is 
a  paragraph  which  shows  that  he  considers  the  value  of 
things  not  capable  of  increase  in  supply — the  "rare  produc- 
tions of  nature  and  art  " — to  be  subject  to  no  general  rule, 
because  dependent  merely  on  the  wealth  and  taste  of  the 
community.1  That  is  to  say,  unless  there  is  some  ascer- 
tainable  rule  governing  the  conditions  of  the  supply  of 
goods,  there  is  no  rule  of  their  value.  But  the  utility 

1  P.  97.  Cf.  p.  105. 


98  LABOR  THEORY  OF  VALUE 

theory  is  a  whole  explanation  of  value  lying  precisely  in  this 
region  of  no  rules.1 

4.  We  come  shortly  to  the  explanation  that  nearly  cor- 
responds with  Adam  Smith's  "  empirical  account."  Here 
the  scene  is  the  social  economy.  Cost  of  production — al- 
ways the  sum  of  labor  and  abstinence — must  be  divided  into 
(a)  cost  on  the  part  of  the  producer  or  seller  and  (b)  on 
the  part  of  the  consumer  or  purchaser.  The  latter  is  the 
amount  of  labor  and  abstinence  which  would  have  to  be  un- 
dergone by  the  consumers  if  they  themselves,  or  some  of 
them  in  behalf  of  themselves  and  the  others,  were  to  resort 
to  producing  the  good  in  question  instead  of  buying  it. 
The  former  cost  sets  the  minimum  limit  to  price,  or  ex- 
change value.  The  latter  sets  the  maximum.  Under  cir- 
cumstances of  free  competition,  when  no  producer  possesses 
any  advantage  over  another,  these  two  limits  coincide,  and 
the  price  of  commodities  therefore  represents  the  aggregate 
amount  of  labor  and  abstinence  necessary  to  continue  their 
production.2  This  division  of  cost  into  two  parts,  each 
forming  a  limit,  is  Senior's  peculiar  and  inferior  way  of 
describing  the  action  of  competition  among  producers.  He 
concludes  nearly  in  the' ordinary  way: 

"  If  the  price  should  rise  beyond  the  cost  of  their  [the  com-, 
modities']  production,  the  producers  must  receive  more  than  an 
average  remuneration  for  their  sacrifices.  As  soon  as  this 
has  been  discovered  capital  and  industry  flow  towards  the  em- 
ployment which,  by  this  supposition,  offers  extraordinary  ad- 
vantages. Those  who  formerly  were  purchasers,  or  persons 
on  their  behalf,  turn  producers  themselves,  until  the  increased 
supply  has  equalized  the  price  with  the  cost  of  production."  3 

The  reverse  movement,  of  course,  prevents  an  abnormal  fall 

3But  yet  of  all  English  writers  previous  to  Jevons,  he  develops  the  ex- 
planation most  compatible  with  the  utility  theory  of  value. 
*P.  101.  8P.  101. 


3571  SENIOR  99 

of  prices.  This  process  of  bringing  exchange  values  into 
proportion  to  subjective  costs  of  production,  reduces  itself 
simply  to  the  adjustment  of  values  to  such  a  level  that  the 
wages  and  profits  into  which  they  are  divided  in  each  in- 
dustry furnish  the  regular  or  average  (as  we  should  say, 
"  static ")  remuneration  to  the  labor  and  abstinence  re- 
quired for  production. 

5.  We  see,  then,  that  where  labor  and  abstinence  are  the 
only  "  obstacles  "  to  supply,  or  where  profits  and  wages  are 
the  only  shares  which  "  enter  into  "  price,  values  will  be  in 
proportion  to  cost  of  production,  which  is  not  labor,  but  a 
"  sum  of  labor  and  abstinence."  The  next  question  is,  in 
what  light  does  Senior  regard  rent.  Rent,  in  his  view,  over- 
turns the  whole  correlation  of  value  with  subjective  cost  of 
production.  And  here  we  are  introduced  to  Senior's  re- 
markable extension  of  the  concepts  of  rent  and  of  natural 
agents.  In  the  first  place,  rent  is  defined  to  be  the  return 
to  natural  agents  which  are  not  universally  accessible  (p.  90). 
But  in  the  second  place,  rent  is  defined  to  be  the  surplus  of 
value  produced  above  the  amount  required  to  remunerate 
the  sacrifices  of  production. 

"  If  the  established  division  is  adhered  to,  and  all  that  is 
produced  is  to  be  divided  into  rent,  profit,  and  wages, — and 
certainly  that  appears  to  be  the  most  convenient  classification, — 
and  if  wages  and  profit  are  to  be  considered  as  the  rewards  of 
peculiar  sacrifices,  *  *  *  it  is  clear  that  under  the  term 
'  rent '  must  be  included  all  that  is  obtained  without  any  sacri- 
fice; or,  which  is  the  same  thing,  beyond  the  remuneration  for 
that  sacrifice;  all  that  nature  or  fortune  bestows  either  with- 
out any  exertion  on  the  part  of  the  recipient,  or  in  addition  to 
the  average  remuneration  for  the  exercise  of  industry  or  the 
employment  of  capital."  * 

1  Pp.  91-2.  P.  128,  the  question  of  nomenclature  is  discussed  all  over 
again.  Rent  is  "the  revenue  spontaneously  offered  by  nature  or  acci- 
dent." 


100          LABOR  THEORY  OF  VALUE         [358 

Accordingly,  rent  includes  not  only  the  return  to  land,  in 
the  widest  economic  sense  of  this  term,  but  also  the  return 
to  secret  processes  of  production,  and  to  talents  or  extra- 
ordinary personal  abilities.1  This  necessitates  the  very 
curious  use  of  the  words  "  natural  agents  "  to  include  ex- 
clusive knowledge  of,  or  right  to,  an  advanced  process,  and 
talents  or  unusual  faculties: 

"  The  mere  knowledge  of  the  operations  of  nature,  as  long 
as  the  use  of  that  knowledge  can  be  confined  either  by  secrecy 
or  law,  creates  a  revenue  to  its  possessor  analogous  to  the  rent 
of  land  *  *  *  so  precisely  resembling  the  rent  of  land, 
that  it  often  receives  the  same  name,"  (and  it.  must  be  called 
rent). 

The  salary,  wages,  or  remuneration  of  the  laborer  may 
really  be  composed  of  wages,  rent,  and  profits: 

"  Is  then  the  extraordinary  remuneration  of  the  labourers, 
which  is  assisted  by  extraordinary  talents,  to  be  termed  Rent 
or  Wages?  It  originates  in  the  bounty  of  nature;  so  far  it 
seems  to  be  rent.  It  is  to  be  obtained  only  on  the  condition 
of  undergoing  labour;  so  far  it  seems  to  be  wages.  It  might 
be  termed  *  *  rent  which  can  be  received  only  by  a  labourer, 
or  wages  which  can  be  received  only  by  the  proprietor  of  a 
natural  agent.  But  as  it  is  clearly  a  surplus,  the  labour  having 
been  previously  paid  for  by  average  wages,  and  that  surplus  the 
spontaneous  gift  of  nature,  we  have  thought  it  most  convenient 
to  term  it  rent."  2 

*Pp.  91,  128-135.  For  general  argument  to  justify  inclusion  of  per- 
sonal qualities  within  wealth,  see  pp.  9-10. 

*Ibid.,  pp.  129-30.  Some  of  the  extraordinary  earning  power  or 
ability  of  the  laborer  may  be  the  result  of  education  and  training  for 
which  sacrifices  have  been  made.  Such  abilities  are  ''immaterial  cap- 
ital," and  the  part  of  the  whole  wages  due  to  them  is  really  profit  on 
this  capital  (p.  130).  Then  wages  of  skilled  or  professional  labor  may 


359]  SENIOR  ioi 

6.  Does  this  rent,  the  surplus  of  value  above  reward  for 
true  cost  of  production,  "enter  into  price?"  Senior  does 
not  use  these  words  or  discuss  this  question  directly,  but, 
although  he  follows  Ricardo  precisely  in  explaining  rent  as 
a  differential  return  and  defends  the  doctrine  vigorously 
against  Say's  attacks,  he  assumes  nevertheless,  contrary  to 
Ricardo,  that  rent  does  "  enter  into  price  "  in  the  sense  of 
constituting  a  source  of  permanent  disproportionality  of 
value  to  subjective  cost  of  production.  As  was  intimated 
some  pages  back,  the  state  of  free  competition,  as  under- 
stood by  Senior,  is  highly  ideal,  postulating  not  only  the 
ordinary  condition  of  ideal  mobility  of  capital  and  labor, 
but  also  the  use  of  none  but  free  natural  agents: 

"  When  we  speak,  therefore,  of  a  class  of  commodities  as 
produced  under  circumstances  of  equal  competition,  or  as  the 
result  of  labour  and  abstinence  unassisted  by  any  other  appro- 
priated agent,  *  *  *  we  do  not  mean  to  state  that  any 
such  commodities  exist,  but  that,  if  they  did  exist,  such  would 
be  the  laws  by  which  their  prices  would  be  regulated."  * 

He  takes  up  the  example  of  the  watch,  a  commodity  ad- 
duced by  McCulloch  and  others  as  having  a  value  derived 
from  labor  cost  alone,  and  shows  that  at  every  turn  rent,  of 
the  diverse  kinds  he  has  defined,  is  paid  out  of  its  price.2 

contain  rent  for  inborn  talents,  profit  for  abilities  acquired  through  the 
sacrifice  called  abstinence,  and  wages  for  the  real  disutility  of  labor  in- 
curred. "Forty  pounds  a  year  would  probably  pay  all  the  labour  that 
[a  lawyer]  undergoes  in  order  to  make,  we  will  say,  £4,000  a  year.  Of 
the  remaining  ,£"3,060  probably  ^"3,000  may  be  considered  rent"  (p.  134). 
"The  intellectual  and  moral  capital  of  Great  Britain  far  exceeds  all  her 
material  capital,  not  only  in  importance,  but  even  in  productiveness." 
Ibid. 

'P.  114. 

'P.  112.  The  payment  of  rent  in  every  case  is  but  the  wedging  in  of 
a  slice  between  value  and  the  remuneration  for  cost  of  production. 


102  LABOR  THEORY  OF  VALUE  [-560 

7.  What  is  the  net  result  of  Senior's  argument  for  the 
labor-cost  theory  of  value?  In  the  first  place,  Senior  had 
little  to  say  about  the  difficulty  of  "  fixed  and  circulating 
capital "  which  took  so  much  of  Ricardo's  time.  The 
reason  is  simple.  Of  course  the  values  of  products  are  out 
of  proportion  to  their  labor  costs,  because  of  the  different 
lengths  of  time  required  to  produce  them.  Two  goods  may 
cost  the  same  labor,  but  differ  in  value. 

"  The  principle  is  that,  though  in  both  cases  the  labour  em- 
ployed is  the  same,  more  abstinence  is  necessary  in  the  one 
case  than  in  the  other."  * 

The  great  effort  of  Ricardo  to  force  the  facts  into  some 
conformity  with  the  only  philosophy  of  value  he  possessed, 
by  asking  us  to  consider  "  profits  "  an  element  about  in  pro- 
portion to  wages  cost,  though  they  are  not,  becomes  un- 
necessary from  Senior's  view-point.  The  motive  to  under- 
take this  forcing  of  facts  is  undermined.  For  "  profits " 
stand  on  the  subjective  basis  of  "  abstinence,"  just  as  wages 
stand  on  the  base  of  labor. 

Furthermore,  according  to  Senior,  land  rent  "  enters 
into  "  price.  So  far,  both  "  profits  "  of  stock  and  rent  of 
land  exist  to  destroy  the  proportionality  of  values  to  labor 
cost.  This  is  the  result  to  which  Malthus's  criticisms  of 
Ricardo  had  led.  But  Senior's  criticism  goes  beyond  Mal- 
thus's. Wages,  as  an  element  in  entrepreneur's  cost,  are 
not  even  in  proportion  to  the  labor  remunerated.  That  is 
to  say,  this  is  what  Senior  says  if  we  keep  his  thought  while 
reforming  his  language.  He  states  that  the  actual  income, 
which  we  always  call  wages,  is  really  composed  in  many 
cases  of  wages,  profits,  and  rent.  He  says  this  because  he 
wishes  to  define  wages  as  that  remuneration  which  is  in  pro- 
portion to  sacrifice.  In  this  departure  in  terminology  we 

*Pp.  IOO-IOI. 


361]  SENIOR  I03 

cannot  follow  him.  It  is  the  whole  wage  of  a  laborer  which 
is  truly  analogous  to  the  rent  of  a  physical  unit  of  land. 
Different  laborers,  of  different  earning  capacities,  could  be 
conceived  of  as  ranged  in  a  scale,  so  as  to  give  a  differential 
aspect  to  their  incomes.  Senior's  rent  to  skill  is  really  an 
excess  of  wages  over  the  amount  required  to  be  in  propor- 
tion to  disutility.  As  he  himself  wrote  in  one  place: 

"  There  are  few  employments  in  which  extraordinary  powers 
of  body  and  mind  do  not  receive  an  extraordinary  remunera- 
tion. It  is  the  privilege  of  talent  to  work  not  only  better  but 
more  easily.  It  will  generally  be  found,  therefore,  that  the 
commodity  or  service  produced  by  a  first-rate  workman,  while 
it  sells  for  more  than  an  average  price,  has  cost  less  than  an 
average  amount  of  labor,  [i.  e.,  disutility.]"  * 

Said  Ricardo:  The  principle  of  value  is  that  labor  cost 
regulates  it;  but  this  principle  is  considerably  modified  by 
the  fact  that  the  values  of  different  commodities  have  to  in- 
clude different  proportions  of  "  profit."  Piecing  together 
for  ourselves  what  Senior  says,  it  is  his  position  that  the 
value  of  commodities  must  include  (if  the  commodities  are 
to  be  produced)  rent,  profits,  and  wages;  rent  and  profits, 
being  different  percentages  in  the  whole  entrepreneur's  cost 
of  different  goods,  make  values  out  of  proportion  to  labor 
cost;  there  is  no  necessity  of  considering  profits  as  an  ele- 
ment in  entrepreneur's  costs  approximately  in  proportion  to 
wages;  and  lastly,  wages  are  not  in  proportion  to  labor, 
which  is  disutility.2 

'P.  129. 

1  In  an  unobtrusive  position  further  on  in  the  book  he  adopts  the  labor- 
command  standard,  but  without  discussion.  "The  best  standard  of 
value  for  philosophical  purposes  appears  to  be  the  command  of  labour." 
This  appears  to  be  an  uncritical  and  passing  acquiescence  in  the  views 
of  Malthus. 


CHAPTER  IX 

JOHN    STUART    MILL 

I.  Though  Mill  regarded  his  exposition  of  the  theory  of 
value  with  great  satisfaction — a  fact  that  has  occasioned  in- 
numerable thrusts  at  him  since — his  contributions  to  the 
whole  subject  were  not  great,  considering  the  work  of 
Ricardo,  the  criticisms  of  it  by  Malthus,  and  the  abundance 
of  suggestions  in  the  writings  of  Senior.  His  terminolog- 
ical faults  are  gross,  and  in  many  places  his  thought  is 
very  loose.  His  entire  discussion  of  value,  above  all,  lacks 
precision.  By  value  is  to  be  understood  exchange  value, 
general  power  of  purchasing,  and  Mill  insists  strongly  on 
the  necessity  of  keeping  in  mind  that  a  general  rise  or  fall 
of  value  so  defined  is  "  unthinkable."  Value  is  purely  a 
relative  term.  The  conditions  essential  to  value  are  utility 
and  difficulty  of  attainment.  Difficulty  of  attainment  may 
"  consist  in  an  absolute  limitation  of  supply  "  or  in  "  the 
labour  and  expense  requisite  to  produce  the  commodity."  * 
When,  in  the  latter  event,  labor  is  applied  under  conditions 
of  diminishing  returns,  a  third  case  of  value  is  distin- 
guished for  separate  treatment.  Following  Malthus  in  his 
important  innovation  of  giving  the  "  empirical  account  " 
precedence,  Mill  begins  with  the  assertion  that  the  law  of 

^Principles,  6th  ed.,  vol.  i,  pp.  546-7.  The  language  is  uncritical. 
Absolute  limitation  of  supply  is  not  a  case  of  difficulty  of  attainment, 
but  a  case  of  value  apart  from  questions  of  difficulty  of  attainment. 
Senior's  analysis  was  superior. 

104  [362 


363]  JOHN  STUART  MILL  105 

value  of  the  first  class  of  things — namely,  those  under  an 
absolute  limitation  of  supply — is  merely  the  law  of  supply 
and  demand. 

,  "  There  is  another  law  for  that  much  larger  class  of 
things  which  admit  of  indefinite  multiplication."  1  This  is 
a  law  of  entrepreneur's  costs  of  production.  While  demand 
and  supply  rule  alone  in  a  certain  field,  and  rule  over  the 
oscillations  of  value  in  all  fields,  in  the  case  of  reproduc- 
ible goods, 

"  they  themselves  [i.  e.  demand  and  supply]  obey  a  superior 
force,  which  makes  value  gravitate  towards  Cost  of  Produc- 
tion. *  *  *  Demand  and  Supply  always  rush  to  an  equili- 
brium, but  the  condition  of  stable  equilibrium  is  when  things 
exchange  for  each  other  according  to  their  cost  of  production."  2 

Cost  is  called  now  by  Ricardo's  words  "natural  value;" 
now  by  Malthus's,  "  necessary  price."  Cost  of  production 
is  defined  as  follows,  in  the  chapter  which  summarizes  the 
theory  of  value: 

"  Cost  of  production  consists  of  several  elements,  some  of 
which  are  constant  and  universal,  others  occasional.  The 
universal  elements  of  cost  of  production  are  the  wages  of  the 
labour  and  the  profits  of  the  capital.  The  occasional  elements 
are,  taxes  and  any  extra  cost  occasioned  by  a  scarcity  value 
of  some  of  the  requisites." 

With  respect  to  rent,  Mill  follows  Ricardo  for  the  general 
rule,  instead  of  Malthus  and  Senior: 

"  Rent  is  not  an  element  in  the  cost  of  production  of  the 
commodity  which  yields  it;  except  in  the  case  (rather  conceiv- 
able than  actually  existing)  in  which  it  results  from,  and 
represents,  a  scarcity  value.  But  when  land  capable  of  yield- 

'Vol.  i,  p.  552.  'Vol.  i,  p.  561. 


I06          LABOR  THEORY  OF  VALUE          [364 

ing  rent  in  agriculture  is  applied  to  some  other  purpose,  the 
rent  which  it  would  have  yielded  is  an  element  in  the  cost  of 
production  of  the  commodity  which  it  is  employed  to  produce." 1 

If  Mill  had  followed  the  lead  given  in  the  last  sentence  to 
its  logical  end,  the  result  ought  to  have  been  the  inclusion 
of  ground-rent  as  an  element  in  entrepreneur's  costs.  But, 
in  spite  of  these  concessions,  he  thought  of  rent  habitually 
as  failing  to  enter  into  price,  and  thus  failing  to  be  a  cause 
of  disproportionality  between  labor-cost  and  value. 

2.  The  profit  of  capital  is  stated  explicitly  to  be  the  re- 
muneration of  abstinence,  but  nothing  is  made  to  depend 
on  this.2  Abstinence  is  not  elevated  into  a  position  logic- 
ally coordinate  with  labor,  nor  are  the  two  conceived  of 
together  as  constituting  subjective  costs,  as  distinguished 
from  entrepreneur's  costs,  consisting  in  profits  and  wages.3 
While  the  language  of  Mill  in  diverse  places  shows  that  he 
was  well  enough  aware  of  the  difference  between  the  two 
main  forms  of  cost,  so  little  was  this  essential  distinction 
ever  ready  in  his  mind  that  he  is  able  to  say,  without  real- 
izing the  offence,  just  as  Ricardo  does:  "Besides  the  nat- 
ural and  necessary  elements  in  cost  of  production — labour 
and  profits  *  *  ."  4  When  the  time  comes  to  develop  the 
traditional  philosophical  account  of  value,  abstinence  is  for- 
gotten. Labor  alone  comes  to  the  front.  The  aberration, 
due  to  profits,  of  the  value  of  products  from  the  standard 
required  by  labor  cost,  is  treated  not  in  a  "  philosophical " 
account  like  Senior's,  which  endeavors  to  include  and  ex- 
plain the  case,  but  is  regarded  as  an  exception  to  the  "  phil- 
osophical "  explanation,  or  as  an  error  in  it. 

1  Vol.  i,  p.  589.  J  Vol.  i,  p.  568. 

'The  socialists'  attacks  upon  abstinence  as  a  cost  are  really  directed 
against  the  ethical  coordination  of  it  with  labor. 
4  Vol.  i,  p.  574. 


365]  JOHN  STUART  MILL 

3.  There  is  a  place  in  his  book  where  Mill  wavers  in  the 
decision  to  include  profits  in  cost  of  production.  The  prob- 
able explanation  of  his  hesitancy  is  of  considerable  interest, 
for  it  suggests  the  internal  weakness  of  the  theory  that 
cost  in  any  form  is  the  essence  of  value.  His  doubt  arises 
in  connection  with  the  familiar  case  of  the  relative  values 
of  a  cask  of  wine  and  a  piece  of  cloth,  originally  costing 
the  same  amount  of  labor  in  their  production.  The  diffi- 
culty arises  from  the  fact  that  the  wine  alone  continues  to 
increase  in  value  through  mere  lapse  of  time: 

"  The  wine  and  the  cloth  were  made  by  the  same  original 
outlay.  Here  then  is  a  case  in  which  the  natural  values,  re- 
latively to  one  another,  of  two  commodities,  do  not  conform 
to  their  cost  of  production  alone,  but  to  their  cost  of  produc- 
tion plus  something  else." 

In  this  sentence  Mill  excludes  "  profits  "  from  cost.  But 
he  continues :  "  Unless,  indeed,  for  the  sake  of  generality 
in  the  expression,  we  include  the  profit  which  the  wine 
merchant  foregoes  during  the  five  years  in  the  cost  of  pro- 
duction of  the  wine."  *  The  word  "  foregoes  "  (not  itali- 
cized by  Mill)  is  uncalled  for.  The  wine  merchant  does 
not  get  profits  he  foregoes  elsewhere,  but  the  profits  he 
makes  from  the  added  value  of  the  wine.  They  might  be 
greater  or  less  than  the  profits  foregone  elsewhere.  The 
forces  tending  to  make  them  equal  to  those  elsewhere  relin- 
quished are  precisely  the  same  in  this  case  as  in  any  other. 
If  they  are  greater,  more  five-year-old  wine  will  be  brought 
to  the  market  and  its  price  will  fall,  and  if  they  are  less  the 
reverse  will  happen.  What  is  the  difference  between  this 
case  and  the  case  of  an  ordinary  industrial  product  that 
Mill  should  falter  so?  Does  capital  (using  the  term  in  the 

lVo\.  i,  pp.  569-70. 


I08  LABOR  THEORY  OF  VALUE  [366 

sense  defined  by  J.  B.  Clark),  the  fund  of  wealth  em- 
ployed in  production,  play  different  roles  in  the  two  cases? 
Not  in  the  least.  Suppose  a  fund  of  capital  is  embodied  in 
a  certain  quantity  of  raw  material  for  a  certain  length  of 
time  until  the  same  becomes  final  product.  The  final 
product,  besides  covering  all  other  expenses,  affords  a  sum 
of  value  equal  to  the  capital  invested  in  materials  plus  the 
interest  on  it.  The  difficulty  felt  in  the  case  of  the  wine 
was  undoubtedly  that  no  tools,  machinery,  or  labor  were 
employed  upon  it  during  the  time  of  its  improvement  in 
value.  The  changes  working  within  it  effected  its  increase 
in  value  merely  by  augmenting  its  utility  to  users  of  wine. 
The  increase  of  value,  secondly,  affords  a  "  profit "  or  in- 
terest. This  profit  may  strike  the  mind  as  a  surplus  over 
cost  to  the  entrepreneur,  but  the  relation  of  this  interest  to 
the  value  of  the  final  product  is  precisely  the  same  as  in 
any  common  case  of  manufacture.  Interest  as  a  cost  can 
influence  the  value  of  the  product  only  by  influencing  its 
supply.  To  discover  the  essential  nature  of  value,  we  must 
lay  bare  the  causes  which  determine  what  the  value  of  a 
given  supply  is,  independently  of  its  cost.  Cost  and  value 
may,  in  certain  cases,  tend  to  make  mutual  adjustments, 
but  these  are  effected  only  by  means  of  changes  in  supply. 
Value  is  not  determined  by  cost  per  se,  or,  that  is  to  say, 
cost  is  by  no  means  of  its  essence.  In  the  ordinary  case, 
if  one  capital  is  employed  for  a  longer  time  than  another, 
the  outwardly  active  process  of  production  is  continued  for 
a  longer  time.  If  extra  profit  accrues  through  a  time  when 
labor  works  and  wheels  turn,  it  is  easy  to  say  that  profits 
must  be  paid,  and  therefore  the  value  of  the  product  must 
be  of  such  and  such  an  extent.  But  in  an  instance  where 
the  value  increases  without  the  whirl  of  wheels  and  the 
manipulation  of  tools,  the  phenomenon  naturally  presents 
itself  to  the  mind  in  an  unfamiliar  aspect.  The  wiine 


367]  JOHN  STUART  MILL  IOg 

merchant  remains  passive,  and  it  seems  plain  that  in- 
stead of  his  expense  dictating  what  the  value  of  the  wine 
shall  be,  the  truth  is,  he  takes  what  the  causes  inde- 
pendently determining  the  value  of  the  wine  give  him. 
Beyond  a  doubt  there  is  a  relation  of  cost  to  value,  but 
there  are  instances  where  the  ultimate  philosophy  that  cost 
is  the  very  essence  of  value  applies  with  such  unsatisfac- 
tory results  that  any  but  the  most  doctrinaire  classical 
economist  must  falter  and  hasten  on. 

4.  If  "  profits  "  are  a  part  of  entrepreneur's  cost  of  pro- 
duction, the  question  which  confronted  Ricardo  must  re- 
appear. Does  not  the  variety  of  the  proportions  in  which 
fixed  and  circulating  capital  are  combined  in  production, 
free  values  from  the  regulation  of  labor  cost?  The  con- 
sideration of  this  question  in  Mill's  Principles  is  accom- 
panied by  unpardonable  blunders  in  terminology.  Mill's 
mind  seems  here  completely  tradition-ridden.  The  havoc  is 
wrought  in  the  use  of  terms  by  adopting  the  view  that  be- 
sides labor  cost  influencing  value,  wages  also  influence  it. 
In  the  topical  analysis  (Table  of  Contents,  vol.  i,  p.  15) 
the  outline  of  the  chapter  on  cost  of  production  proceeds  • 
as  follows : 

"  Principal  element  in  cost  of  production,  quantity  of  labour. 
Wages  not  an  element  in  cost  of  production,  except  in  so  far 
as  they  vary  from  employment  to  employment." 

When  cost  is  used  in  a  sense  which  makes  labor  one  of  its 
elements,  wages  are  not  an  element  in  so  far  as  they  vary 
from  employment  to  employment,  or  in  any  other  way.  In 
the  sense  of  cost  in  which  wages  are  an  element,  the  varia- 
tion of  the  latter  from  employment  to  employment  is  an 
irrelevant  consideration.  Again  we  find  such  an  observa- 
tion as  the  following :  "  The  relative  wages  of  the  labour 


IIO          LABOR  THEORY  OF  VALUE         [368 

necessary  for  producing  different  commodities  affect  their 
value  just  as  much  as  the  relative  quantities  of  labour."  1 
In  the  chapter  on  Ricardo,  we  saw  how  this  form  of  expres- 
sion originated,  and  determined  what  the  comparatively 
simple  truth  is  which  it  so  awkwardly  conveys.  Wages 
cost,  instead  of  affecting  values  "  as  much  as  "  labor  cost, 
does  the  whole  of  the  affecting;  and  labor  cost  affects  values 
only  as  it  affects  wages  cost.  The  end  of  it  all  is,  Mill 
concludes,  with  Ricardo  (and  without  improvement  upon 
Ricardo),  that  a  variation  of  the  general  rate  of  wages 
alters  the  exchange  relations  of  commodities  produced  with 
different  combinations  of  "  fixed  "  and  "  circulating  "  cap- 
ital, independently  of  the  comparative  labor  costs  of  the 
same.  What  is  true  of  Ricardo's  statement  is  true  of  this. 
The  proposition  regarding  the  effect  of  a  change  of  the 
general  rate  of  wages  (or  of  the  rate  of  profits,  for  one 
must  always  accompany  the  other  in  the  view  of  Ricardo 
and  Mill)  upon  "  relative  values,"  may  be  a  true  dynam- 
ical principle;  but  the  qualification  of  the  original  labor- 
cost  theory  of  value  which  is  contained  in  this  is  statical. 
Exchange  values  are  statically  out  of  proportion  to  com- 
parative labor  costs,  without  any  reference  to  changes  in 
rates  of  wages  and  profits. 2  The  reason  is  that  interest 
is  an  element  in  entrepreneur's  costs  as  well  as  wages.  Of 
the  total  of  wages  plus  interest,  in  some  cases  interest  may 
be  30  per  cent.,  in  other  cases  60  per  cent.,  or  virtually  any 
other  per  cent.  Values  being  in  proportion  to  the  total, 
cannot  be  in  proportion  to  either  element  alone.2 

'Vol.  i,  p.  507. 

*Mill  emphasizes  the  fact  that  he  is  considering  the  causes  of  varia- 
tions in  values.  It  remains  true  that  both  he  and  Ricardo  should  have 
considered  the  causes  of  statical  aberration  of  values  from  the  standard 
of  labor  cost. 

3  It  may  be  useful  to  recall  the  explanation  Ricardo  made  of  his  posi- 


369]  JOHN  STUART  MILL  1 1 1 

5.  Up  to  the  present  point,  Mill  has  not  taken  a  decided 
stand  in  favor  of  any  qualification  of  the  labor-cost  theory 
which  Ricardo  had  not  also  approved.  In  his  treatment  of 
skilled  labor  he  admits  of  a  further  qualification.  Ricardo 
handled  the  subject  in  a  very  unsatisfactory  manner.  While 
he  gave  the  appearance  of  finding  no  difficulty  for  his  law 
of  value  in  skilled  labor,  he  unconsciously  evaded  the  real 
question  at  issue.  Mill  writes: 

"  When  the  wages  of  an  employment  permanently  exceed 
the  average  rate,  the  value  of  the  thing  produced  will,  in  the 
same  degree,  exceed  the  standard  determined  by  mere  quan- 
tity of  labour.  Things,  for  example,  which  are  made  by  skilled 
labour,  exchange  for  the  produce  of  a  much  greater  quantity 
of  unskilled  labour;  for  no  reason  but  because  the  labour  is 
more  highly  paid."  * 

The  plain  implication  of  this  passage  is  that  skilled  labor 
receives  remuneration  out  of  proportion  to  the  quantity  of 
labor  rewarded.  Therefore  it  is  also  implicit  that  quantity 
of  disutility  is  what  determines  quantity  of  labor.  Since 
labor  cost  operates  upon  exchange  values  only  by  way  of 
wages  cost,  in  so  far  as  wages  cease  in  fact  to  be  an  accurate 
index  of  real  labor  cost,  a  new  difficulty  is  created  for  the 
labor  theory — one  very  important  in  principle.  Mill  him- 

tion  with  regard  to  this  point.  "  I  have  not  said,  because  one  commo- 
dity has  so  much  labour  bestowed  upon  it  as  will  cost  /"looo  and  another 
so  much  as  will  cost  £2000  that  therefore  one  would  be  of  the  value  of 
^"1000  and  the  other  of  the  value  of  £2000,  but  I  have  said  that  their 

value  will  be  to  each  other  as  two  to  one It  is  of  no  importance 

to  the  truth  of  this  doctrine,  whether  one  of  these  commodities  sells  for 
^noo  and  the  other  for  ^2200,  or  one  for  ^"1500  and  the  other  for 
^"3000."  (Conner  ed.  Ricardo's  Principles,  p.  39.)  The  interest  qual- 
ification signifies  that  the  commodities  may  exchange  at  other  ratios 
than  two  to  one. 
'Vol.  i,  p.  566- 


112  LABOR  THEORY  OF  VALUE  [370 

self  lays  little  emphasis  upon  this  point.  He  regards  the 
superior  remuneration  of  skilled  labor  as  due  virtually  to 
a  failure  of  perfect  competition.  In  presenting  the  subject 
in  this  light,  he  anticipates  the  important  theory  of  non- 
competing  groups  later  developed  by  Cairnes: 

"  We  have  before  remarked  that  the  difficulty  of  passing 
from  one  class  of  employments  to  a  class  greatly  superior,  has 
hitherto  caused  the  wages  of  all  those  classes  of  labourers, 
who  are  separated  from  one  another  by  any  very  marked 
barrier,  to  depend  more  than  might  be  supposed  upon  the 
increase  of  the  population  of  each  class,  considered  separ- 
ately; and  that  the  inequalities  in  the  remuneration  of  labour 
are  much  greater  than  could  exist  if  the  competition  of  the 
labouring  people  generally  could  be  brought  practically  to  bear 
on  each  particular  employment."  * 

It  is  hardly  necessary  or  advisable  to  define  perfection  of 
competition  in  such  broad  terms  as  to  make  it  require  that 
the  remuneration  of  skilled  labor  should  be  reduced  to  the 
standard  of  disutility  of  labor.  In  any  event,  the  tendency 
of  remuneration  to  approach  such  a  level  is  ineffective, 
and  therefore  negligible.  Static  principles  may  be  condi- 
tioned upon  assumptions  contrary  to  fact,  but  the  assump- 
tions are  never  to  be  made  so  violent  that  the  law  is  not  an 
effective  force  which  must  be  apprehended  before  dynamic 
reality  can  be  explained.  Under  perfect  competition,  prop- 
erly defined,  skilled  labor  is  still  a  thorn  in  the  flesh  of  the 
old  theory  of  value. 

6.  It  remains  to  summarize  Mill's  view  of  the  relation 
of  labor  cost  to  exchange  value,  and  to  compare  it  with  the 
views  of  Ricardo,  Malthus  and  Senior.  In  Mill's  own  lan- 
guage we  find  the  following  summary:  If  one  thing  ex- 

1  Vol.  i,  pp.  566-7. 


371  ]  JOHN  STUART  MILL 

changes  for  more  than  another,  the  cause  must  be  that  "  it 
requires  for  its  production  either  a  greater  quantity 
of  labor,"  or  ( i )  "a  kind  of  labour  permanently  paid  at 
a  higher  rate,"  or  (2)  "the  capital  which  supports  that 
labour  must  be  advanced  for  a  longer  period,"  or,  lastly, 
(3)  "the  production  is  attended  with  some  circumstance 
which  requires  to  be  compensated  by  a  permanently  higher 
rate  of  profit."  "  Of  these  elements,  the  quantity  of  labor 
required  for  the  production  is  the  most  important;  the 
effect  of  the  others  is  smaller,  though  none  of  them  is 
insignificant."  * 

The  qualification  which  we  have  numbered  one  (i)  is 
an  addition  to  Ricardo's  list  of  qualifications.  Number 
two  (2)  is  Ricardo's  own  work;  and  of  number  three  (3) 
he  is  aware,  though  he  abstracts  from  it  with  his  customary 
facility.2  In  the  end,  we  may  say  that  Mill  placed  more 
stress  on  qualifications  of  the  labor  theory  than  did  Ricardo. 
Senior  made  both  ground  rent  and  the  superior  wages  of 
skilled  labor  causes  of  qualification  of  the  labor-cost  theory. 
Mill  took  Senior's  view  of  skilled  labor,  but  took  his  stand 
with  Ricardo  on  the  general  question  of  ground  rent. 

'Vol.  i,  p.  590. 

1  See  Ricardo,  Principles,  p.  83.  "  Let  us  suppose  that  all  commodi- 
ties are  at  their  natural  price,  and  consequently  that  the  profits  of  capi- 
tal in  all  employments  are  exactly  at  the  same  rate,  or  differ  only  so 
much  as,  in  the  estimation  of  the  parties,  is  equivalent  to  any  real  or 
fancied  advantage  which  they  possess  or  forego." 


CHAPTER  X 

CAIRNES 

i.  THE  political  economy  of  J.  E.  Cairnes  is  virtually  a 
•treatise  on  value  and  distribution.1  The  points  in  his  work 
which  are  of  interest  to  our  present  purpose  are  his  analysis 
of  cost  of  production  and  his  famous  innovation,  the  theory 
of  non-competing  groups.2  The  views  of  Cairnes  resemble 
those  of  Senior  in  many  ways,  and  are  exceedingly  de- 
structive of  the  labor-cost  theory,  more  so  than  he  seemed 
to  realize  or  cared  to  admit. 

The  conditions  essential  to  the  existence  of  value  are 
given  as  utility,  difficulty  of  attainment,  and  transferable- 
ness.3  This  is  Senior's  statement  with  the  inferior  term, 
"  difficulty  of  attainment "  substituted  for  "  limitation  in 
supply."  How  the  substitution  could  be  made  in  the  face 
of  Senior's  reasons  against  it,  is  one  of  the  ever-recurring 
riddles  in  the  history  of  the  philosophy  that  in  some  way 
cost  is  the  essence  of  value.  The  theory  of  value  is,  accord- 
ing to  the  best  usage  of  the  day,  initiated  by  a  discussion 
of  supply  and  demand.  Cairnes  posed  as  a  critic  of  Mill's 

1  Some  Leading  Principles  of  Political  Economy  Newly  Expounded. 
London,  1874. 

*  A  third  point  might  be  taken  up  were  it  not  for  the  fact  that  Cairnes's 
treatment  of  it  is  hardly  worthy  of  consideration.  This  is  his  rebuttal 
against  the  then  newly  appeared  utility  theory  of  Jevons.  Cairnes 
seems  to  have  had  virtually  no  understanding  of  the  point  Jevons  was 
trying  to  make. 

'P.p. 

114  [372 


373  J  CAIRN  ES  II5 

conception  of  the  law  of  supply  and  demand,  but  Professor 
Marshall  has  shown  conclusively  that  Mill  was  correct  in 
substance  while  Cairnes  was  not.1  Following-  Mill,  Cairnes 
next  proceeds  to  cost  of  production  as  an  influence  funda- 
mental to  that  of  supply  and  demand.  "  The  supply  of  a 
commodity  tends  to  adapt  itself  to  the  demand  at  the  nor- 
mal price,"  or  at  that  price  which  just  suffices  to  yield  to 
the  producers  "  the  average  and  usual  remuneration  on 
such  sacrifices  as  they  undergo."  2  These  sacrifices  are  the 
elements  which  constitute  cost  of  production.  In  the  formal 
definition  of  cost,  Cairnes  makes  it  include  "  the  ultimate 
elements — labour,  abstinence,  and  risk."  3  But  the  coor- 
dinate position  of  risk  is  not  maintained.  For,  in  the  dis- 
cussion of  cost  in  detail,  risk  to  laborers  is  held  to  be  a 
factor  in  labor  cost,  and  risk  to  capitalists  a  factor  in  ab- 
stinence cost. 

"  We  find  labour  as  an  element  of  cost  of  production  meas- 
urable by  reference  to  three  of  its  incidents,  and  to  three  of 
its  incidents  only — ist.  the  duration  of  the  exertion,  or  the 
quantity  of  labour,  2d.  its  severity,  or  irksomeness ;  and  3d. 
the  risk  attending  it."  4 

lSee  Marshall's  Principles,  3rd  ed.,  p.  172,  note,  and  also  the  refer- 
ence there  cited,  Fortnightly  Review,  April,  1876. 

2 P.  41.  Cairnes  claims,  with  great  justice,  that  his  term  "normal 
value"  or  "  normal  price"  is  superior  to  the  old  terms  "  natural"  and 
"necessary"  price  (p.  46). 

3  P.  82. 

4  P.  88.     It  is  a  waste  of  terms  to  call  the  duration  and  quantity  of 
labor  the  same  thing,  and  consequently  to  consider  the  quantity  of  labor 
cost  and  quantity  of  labor  different  things.     Smith  and  Ricardo  merely 
touched  on  this  matter,  but  the  former  says  in  a  passage  incorporated 
also  by  the  latter  in  his  text:  "  There  may  be  more  labour  in  an  hour's 
hard  work  than  in  two  hours  early  business;"  or  quantity  of  labor  is 
the  product  of  duration    multiplied  by  disutility  per  unit  of  time;  and 
this  is  the  preferable  usage. 


Il6  LABOR  THEORY  OF  VALUE  [374 

As  for  abstinence: 

"  the  sacrifice  will  be  measured  by  the  quantity  of  wealth  ab- 
stained from,  taken  in  connection  with  the  risk  incurred,  and 
multiplied  by  the  duration  of  the  abstinence."  x 

With  this  much  said,  Cairnes  drops  risk  from  considera- 
tion. We  may  follow  his  example  in  the  present  chapter, 
since  the  precise  relation  of  risk  or  risk-taking  to  cost  of 
production  need  not  be  decided  in  order  to  determine  the 
import  of  Cairnes's  work  for  the  labor  theory. 

2.  In  Cairnes  we  find  a  repetition  of  the  protest  of 
Senior  against  the  definition  of  cost  from  the  point  of  view 
of  the  capitalist-entrepreneur.  Thus  Cairnes  is  "compelled 
to  dissent"  from  the  "radically  unsound"  doctrine  of  Mill, 
that  wages  and  profits  compose  cost  of  production. 

"  Of  all  ideas  within  the  rangpe  of  economic  speculation,  the 
two  most  profoundly  opposed  to  each  other  are  cost  and  the 
reward  of  cost.  *  *  *  Cost  and  remuneration  are  economic 
antitheses  of  each  other.  *  *  *  Now  in  the  analysis  of 
cost  of  production  which  I  have  quoted  [i,  e.  Mill's]  these  two 
opposites  are  identified."  * 

Cost  cannot  be  defined  from  "  the  partial  and  limited  stand- 
point of  the  capitalist-employer."  3  Caimes  makes  an  ex- 
cellent and  eloquent  plea  for  his  idea,  but  truly  all  that  can 
be  conceded  to  him  is  that  the  two  kinds  of  cost  must  be 
scrupulously  distinguished,  and  that  propositions  true  only 
of  disutility  costs  must  not  be  affirmed  of  entrepreneur's 
costs,  and  vice  versa. ,  As  for  the  views  of  Mill,  this  econ- 
omist stated  that  wages  and  interest  are  rewards  as  well 

1  P.  97.  Abstinence  is  described  as  a  "  negative  "  sacrifice  except  for 
the  "small  positive  element  of  risk." 

'P.  50.  SP.  58. 


375]  CAIRNES  II7 

as  costs.  The  gross  inconsistencies,  however,  of  Mill's  lan- 
guage in  different  parts  of  his  book  justify  scathing  criti- 
cism. 

3.  Cairnes  does  not  quit  the  subject  of  the  measurement 
of  the  subjective  cost  without  turning  his  attention  to  an 
incidental  problem  not  touched,  I  believe,  by  his  predeces- 
sors. He  states  that  the  effort  required  to  produce  a  given 
result  does  not  represent  the  same  sacrifice  for  different 
persons,  being  one  thing  for  the  strong  or  experienced  and 
another  for  the  weak  or  untrained.  Similarly  a  given  sum 
of  capital  may  stand  for  no  appreciable  self-denial  on  the 
part  of  the  person  contributing  it,  if  he  be  rich,  but  for  very 
rigid  self-denial  if  he  be  poor  or  in  moderate  circumstances. 
How  are  such  differences,  Cairnes  asks,  to  be  dealt  with  in 
computing  the  cost  of  production? 

"  The  sacrifices  to  be  taken  account  of,  and  which  govern 
exchange  value,  are,  not  those  undergone  by  A,  B,  or  C,  but 
the  average  sacrifices  undergone  by  the  class  of  labourers  or 
capitalists  to  which  the  producers  of  the  commodity  belong.'' t 

In  view  of  the  fact  that  the  word  average  as  often  serves 
to  cover  up  the  lack  of  an  explanation  as  it  serves  to  ex- 
plain, Cairnes  would  have  done  well  to  be  a  little  more 
explicit.  As  the  present  writer  understands  it,  a  few  addi- 
tional words  will  place  his  idea  beyond  possible  misconcep- 
tion. If  we  call  the  capitalists  who  can  furnish  a  given  sum 
of  capital  at  a  small  sacrifice,  and  the  laborers  who  can 
furnish  a  given  amount  of  labor  (in  the  sense  of  produc- 
tive power)  at  a  small  sacrifice,  strong  producers,  and  call 
others  who  are  situated  in  reverse  circumstances  from  these, 
weak  producers,  Cairnes's  proposition  about  "  average  sac- 
rifice "  means  that  "  within  a  given  field  of  competition  " 
we  may  expect  the  individually  strong  and  individually  weak 

'P.  95- 


LABOR  THEORY  OF  VALUE 


[376 


producers  to  be  thoroughly  and  uniformly  intermingled. 
With  this  meaning,  the  statement  certainly  commands 
assent.  With  this  idea  understood,  we  are  able  to  speak 
of  the  labor  of  coal  miners  as  being  harder  than  that  of 
dry-goods  salesmen,  without  thought  of  the  unusual  cases 
where  a  very  healthy  miner  suffers  less  fatigue  and  dis- 
comfort than  an  invalid  salesman. 

4.  Proceeding  with  labor  and  abstinence  as  cost  of  pro- 
duction, Cairnes  describes  the  relation  of  cost  to  value  in 
terms  clearer  than  any  before  attained  in  the  regular  line 
of  English  "Principles."  Wages  and  "  profits  "  are  de- 
rived from  the  value  of  the  product,  and  "  absorb  the  whole 
of  that  value," 

"  with  the  exception  of  the  case  where  rent  is  also  an  element 
in  the  value  of  commodities  —  a  case  which,  those  acquainted 
with  the  economic  theory  of  rent  will  perceive,  does  not  affect 
the  general  argument."  * 

These  words  make  the  sum  total  of  Cairnes's  discussion  of 
rent,  though  he  has  written  a  large  volume  devoted  chiefly 
to  value  and  distribution.  Value  is  then  everywhere  divided 
into  wages  and  profits.  If  these  wages  and  profits  are  in 
proportion  to  the  sacrifices  remunerated,  value  is  in  propor- 
tion to  the  sum  of  these  sacrifices,  or  cost  of  production. 
The  question,  then,  becomes  definite.  Are  wages  every- 
where in  proportion  to  the  labor  for  which  they  are  paid, 
and  is  interest  an  amount  proportionate  to  the  abstinence 
remunerated?  Strange  as  it  may  seem,  this  simple  ques- 
tion —  the  affirmative  answer  to  which  is  necessary  to  estab- 
lish the  regulation  of  exchange  value  by  "  real  "  or  subjec- 
tive cost  of  production  —  was  never  proposed  by  Mill  or  any 
of  his  classical  predecessors. 

1  Pp.  62-3. 


377]  CAIRNES 

5.  To  answer  this  question,  it  is  first  necessary  to  inquire 
ho\v  far  effective  competition  is  realized  in  actual  industry 
(i.  e.,  in  English  industry,  and  for  purposes  of  present-day 
theory,  English  industry  of  Cairnes's  time  is  a  very  proper 
system  to  consider)  ;  for  wages  and  profits  will  be  in  pro- 
portion to  the  sacrifices  undergone  "  wherever,  and  only  so 
far  as  competition  prevails  among  producers,"  and  laborers 
and  capitalists  have  an  "  effective  choice  "  in  selecting  from 
the  various  occupations  in  the  industrial  field.  First, 
Cairnes  gives  a  very  clear  explanation  of  the  process  by 
which  the  flow  of  capital  and  labor  can  be  redistributed  over 
the  industrial  field  without  the  transfer  of  individual  units 
already  specialized.1  This  disposes  of  some  exaggerated 
and  erroneous  ideas  regarding  the  failure  of  competition; 
but  the  next  step  is  taken  by  Cairnes  himself,  who  points 
out  an  important  limitation  of  competition  not  emphasized 
by  previous  writers.  This  limitation  applies  only  to  the 
competition  of  laborers: 

"  The  competition  of  capital  being  as  we  have  seen,  effec- 
tive over  the  entire  industry  of  each  commercial  country,  it 
follows  that  so  much  of  the  value  of  commodities  as  goes  to 
remunerate  the  capitalist's  sacrifice  *  *  *  will  correspond 
throughout  the  range  of  domestic  industry  with  that  portion 
of  the  cost  which  falls  to  the  capitalist.2 

Not  so  in  the  case  of  labor : 

"  What  we  find,  in  effect,  is,  not  a  whole  population  com- 
peting indiscriminately  for  all  occupations,  but  a  series  of  in- 
dustrial layers,  superposed  on  one  another,  within  each  of 
which  the  various  candidates  for  employment  possess  a  real 
and  effective  power  of  selection,  while  those  occupying  the 
several  strata  are,  for  all  purposes  of  effective  competition,. 

1  Pp.  65-70.  2P.  74- 


120  LABOR  THEORY  OF  VALUE  [378 

practically  isolated  from  each  other."  *  *  *  "  We  are 
thus  compelled  to  recognize  the  existence  of  non-competing 
industrial  groups  as  a  feature  of  our  social  economy."  1 

6.  It  follows  from  this  that  the  exchange  relations  of 
-commodities  produced  by  laborers  in  different  industrial 
groups  are  "  not  governed  by  the  principle  of  cost  of  pro- 
duction." And  the  result  is  much  complicated,  because  even 
a  single  commodity  is  "  very  frequently  "  the  product  of 
the  labor  of  more  than  one  industrial  group.2  The  terms 
•of  exchange  between  two  commodities  will  be  "  governed 
l>y  more  than  one  principle." 

"  So  far  as  the  two  commodities  are  the  products  of  work- 
men in  competition  with  each  other,  their  values  will  be  gov- 
erned by  cost  of  production,  but  so  far  as  they  proceed  from 
workmen  not  in  mutual  competition-,  they  will  be  governed  by 
that  other  principle,  yet  to  be  ascertained,  which  governs  nor- 
mal values  in  the  absence  of  competition."  8 

It  "  generally  happens  that  the  bulk  of  the  value  of  each 
commodity  follows  one  law,  *  *  *  while  a  small  remaining 
element  is  governed  "  by  the  other  law.*  This  unsatisfac- 
tory idea  is  at  times  better  expressed  in  another  way, 
namely,  the  law  of  costs  governs  a  good's  value  in  exchange 
with  commodities  produced  by  the  same  order  of  laborers, 
but  not  in  exchange  with  commodities  produced  by  differ- 
ent orders. 

'Pp.  72-3.  Cairnes  makes  the  same  classification  of  the  industrial 
population  into  groups  that  Mill  made.  For  criticism  and  a  new  classi- 
fication see  Giddings,  "The  Persistence  of  Competition,"  Political 
Science  Quarterly,  vol.  ii,  p.  69  et  seq.\  and  J.  B.  Clark,  "The  Limits 
of  Competition,"  ibid.,  p.  45  et  seq. 

*P.  76.     "  Very  frequently  "  ought  really  to  be  "  nearly  always." 

*P.  76.  *P.  80. 


379]  CAIRNES  I2I 

"  The  true  conception  of  the  law  of  cost  is  thus,  not  of  a 
law  governing  universally  the  values  of  any  class  of  commo- 
dities, but  that  of  one  governing  the  values  of  certain  commo- 
dities in  certain  exchanges."  l 

7.  We  come  now  to  the  second  coordinate  principle  of 
value,  existing  in  addition  to  the  principle  of  cost  of  pro- 
duction, and  held  to  divide  with  it  the  control  of  actual 
values.  This  is  the  so-called  law  of  reciprocal  demand.  Tt 
is  simply  Mill's  law  of  reciprocal  demand  as  developed  by 
him  to  explain  international  values,  applied  by  Cairnes  to 
the  "  strictly  parallel  case  "  of  inter-group  values.  Inter- 
national and  inter-group  values,  or  the  relative  prices  of  the 
products  of  different  nations  or  of  different  groups, 

"  do  not  vary  at  random  irrespective  of  rule  or  measure,  but 
exhibit  precisely  the  same  tendency  to  gravitate  towards  a 
central  point  as  is  manifested  in  those  exchanges  which  are 
governed  by  cost  of  production."  a 

These  words  surely  attribute  a  very  exact  control  of 
values  to  the  "  principle  of  reciprocal  demand."  But  after 
perusing  a  very  interesting  piece  of  text  (pp.  99-105),  in 
which  Cairnes  applies  Mill's  doctrine  of  international  value, 
point  by  point,  to  the  problem  of  non-competing  groups, 
we  come  upon  a  very  important  difference  between  this  prin- 
ciple and  that  of  cost  in  respect  to  control  of  values. 

"  They  each  *  *  furnish  a  centre  about  which  market 
values  gravitate;  but  there  is  this  difference  between  the  two 
cases:  The  centre  furnished  by  Cost  of  Production  stands  re- 
lated to  the  fluctuations  of  the  individual  commodity ;  that 
supplied  by  Reciprocal  Demand  to  the  average  fluctuations  of 
considerable  aggregates  of  commodities.  A  reduction  in  the 

>P.  80.  'P.  98. 


122          LABOR  THEORY  OF  VALUE 

cost  of  producing  a  hat  will  lower  its  price.  *  *  But  an 
alteration  in  the  reciprocal  demand  of  two  trading  nations 
(or  of  two  non-competing  groups)  will  act  upon  the  price 
not  of  any  commodity  in  particular  but  of  every  commodity 
which  enters  into  the  trade.  What  such  an  alteration  necessi- 
tates is  a  change  in  the  average  terms  on  which  the  trade  is 
carried  on;  but  it  decides  nothing  as  to  the  details  by  -which 
the  required  average  shall  be  attained  and  maintained. 
*  *  *  In  the  interchanges  of  non-competing  domestic 
groups,  what  the  reciprocal  demand  of  the  groups  determines 
is  the  average  relative  level  of  prices  within  each  group;  the 
distribution  of  price  among  the  individual  products  being 
regulated  by  the  cause  which  governs  value  within  it,  nameb , 
cost  of  production."  * 

It  develops  that  the  law  of  reciprocal  demand  fails  com- 
pletely of  being  a  principle  coordinate  with,  and  similar 
to,  that  of  costs.  Instead  of  ruling  exchange  values  in  the 
same  way  as  cost  of  production,  only  in  another  field,  it 
turns  out  that  the  force  of  reciprocal  demand  is  incapable 
of  determining  the  value  of  any  single  good.  The  principle 
of  reciprocal  demand  fails  signally  of  fulfilling  Cairnes's 
promise  of  a  principle  other  than  that  of  cost,  which  will 
provide  for  a  central  point  of  gravitation  of  inter-group 
exchange  ratios.  The  purport  of  the  argument  of  Cairnes 
is  no  more  than  this :  the  law  of  reciprocal  demand  merely 
requires  the  general  level  of  international  exchange  values 
to  be  such  that  in  the  long  run  the  exports  of  a  nation  just 
discharge  its  liabilities,  or,  in  other  words,  that  its  exports 
and  imports  will  be  led  to  balance,  except  for  the  payment 
of  interest  on  foreign  debts,  cost  of  carriage  to  foreign 
ship-owners,  etc.  Cairnes  applies  the  law  without  chang- 
ing line  or  point  to  interchange  between  non-competing 
groups. 
'Pp.  105-6.  The  italics  are  mine  except  for  the  word  "average." 


38 1]  CAIRN  ES  I23 

8.  It  is  not  necessary,  in  view  of  our  present  purpose,  to 
enter  further  into  the  nature  of  the  law  of  reciprocal  de- 
mand. The  question  of  importance  to  us  is  the  effect  on 
the  labor-cost  theory  of  value  of  the  doctrine  of  non- 
competing  groups.  Cairnes's  famous  doctrine  merely  adds 
emphasis  to  a  point  already  made  by  Senior,  namely,  that 
the  wages  of  skilled  labor  are  out  of  proportion  to  the 
amount  of  labor  cost  remunerated.  Though  Cairnes  re- 
jects the  definition  of  cost  as  entrepreneur's  cost,  his  whole 
argument  signifies  that  subjective  cost,  or  pain  cost,  can 
control  market  value  only  by  way  of  controlling  the  wages 
and  interest  elements  which  compose  entrepreneur's  cost. 
As  for  the  element  of  interest,  Cairnes,  like  Senior,  hold- 
ing interest  to  be  paid  for  abstinence,  places  it  upon  an  in- 
dependent basis  of  subjective  cost,  and  makes  it  logically 
coordinate  with  wages;  and  Cairnes  would  treat  the  diffi- 
culty of  interest,  or  the  difficulty  of  "  the  different  propor- 
tions of  fixed  and  circulating  capital,"  not  as  Ricardo  did, 
but  precisely  as  Senior  did.1  As  for  the  element  of  wages 
cost,  the  doctrine  of  non-competing  groups  signifies  that 
the  comparative  wages  cost  of  different  commodities  may 
fail  to  represent  their  comparative  labor  costs,  or  specifi- 
cally, that  they  do  so  fail,  when  we  compare  the  cost  of 
commodities  produced  by  different  non-competing  groups. 
Even  if  labor  cost  were  the  only  kind  of  subjective  cost  that 
the  entrepreneur  has  to  remunerate,  true  labor  cost  would 
still  fail  to  control  exchange  values,  because  the  compar- 
ative wage  expenses  of  entrepreneurs  are  not  in  proportion 
to  the  true  amount  of  labor  remunerated  in  each  case. 

1  That  is  to  say,  for  Senior  and  Cairnes,  interest  is  no  longer  an  un- 
explained difficulty  in  the  way  of  the  cost  philosophy  of  value,  but  the 
conception  of  cost  has  been  widened  so  as  to  include  and  explain  the 
case  of  interest.  Cairnes  has  no  longer  a  labor-cost  philosophy,  but  a 
subjective  cost  philosophy  of  value. 


124  LABOR  THEORY  OF  VALUE  [382 

In  the  view  of  Cairnes,  skill  as  such  cannot  be  called  an 
element  in  cost  of  production.  But  skill  may  be,  and  gen- 
erally is,  he  continues, 

"  an  indication  of  that  which  is  an  element  in  cost — namely, 
the  sacrifice  whether  in  the  form  of  labor  or  abstinence,  under- 
gone in  acquiring  the  skill.  *  *  *  The  point  to  be  at- 
tended to  is  that  the  addition  made  to  the  cost  of  production 
[*'.  e.  by  the  employment  of  skilled  labor]  is  in  proportion 
*  *  *  [only]  to  the  sacrifice."  * 

If  competition  were  effective  between  groups  of  laborers, 
it  would  result  that  wages  would  be  forced  to  correspond 
with  the  disutility  of  labor  in  all  employments,  skilled  or 
unskilled  (the  disutility  of  acquiring  the  skill  being  weighed 
by  the  competitors  along  with  the  daily  disutility  of  the 
occupation).  In  the  absence  of  effective  competition — 
namely,  under  the  actual  conditions  of  non-competing 
groups — skilled  labor  generally  receives  a  wage  beyond  that 
proportionate  to  the  comparative  disutility,  past  and  pres- 
ent, incidental  to  it. 

Cairnes  himself  refused  to  regard  his  innovations  as 
causing  any  substantial  damage  to  the  older  theories,  for 
of  his  whole  doctrine  of  non-competing  groups,  he  says : 

"  In  effect  the  point  in  question  is  of  little  more  than  theo- 
retic importance.  As  a  point  of  theory  it  is  proper  to  notice 
it,  but  the  circumstance  it  deals  with  has  little  sensible  effect 
on  the  facts  of  exchange."  z 

9.  In  the  opinion  of  Cairnes,  then,  there  is  a  failure  of 
the  law  of  costs  due  to  a  failure  of  competition.  Since 
Ricardo  expressly  postulated  "  perfect  competition  "  as  a 
condition  essential  to  his  theory,  it  might  seem  as  if  the 

'P.  84.  'P.  78. 


383]  CAIRNES  I25 

difficulty  of  non-competing  groups  is  one  against  which  he 
has  taken  the  necessary  precautions.  This,  however,  can 
hardly  be  the  case.  Ricardo's  discussion  of  the  subject 
of  skilled  labor  is  so  indefinite  that  his  intentions,  with  re- 
spect to  the  meaning  of  the  words  "  perfect  competition  " 
in  this  connection,  are  not  obvious.  But,  in  all  probability, 
Ricardo  could  not  have  meant  that  the  postulate  of  perfect 
competition  provides  against  the  wages  of  skilled  labor  be- 
ing in  excess  of  those  of  common  labor.  For  if  he  had 
meant  this,  he  would  not  have  written  the  section  he  gives 
us  on  skilled  labor.1  In  this  he  says,  in  effect,  that  the 
degree  in  which  different  kinds  of  skilled  labor  enjoy  higher 
wages  does  not  change  greatly  from  time  to  time  (this 
itself  an  error),  and  that  nothing  more  need  be  said,  since 
he  is  considering  only  the  causes  of  change  of  "  relative  " 
values  (this  is  also  incorrect). 

We  will  take  it  for  granted,  then,  that  by  his  assump- 
tion of  free  competition  Ricardo  did  not  intend  to  abstract 
from  the  difficulty  of  skilled  labor.  We  certainly  could 
not  approve  of  such  a  procedure  if  he  had  adopted  it;  for 
there  is  so  little  tendency  for  actual  competition  to  remove 
the  superior  remuneration  of  skill,  that  this  tendency  should 
not  be  recognized  among  legitimate  or  effective  static 
forces.2 

1  Principles,  chapter  i,  section  iii.  Cf.  chap,  v,  sec.  iv  of  the  present 
essay. 

*The  validity  of  a  theory  is  not  proved  if  some  tendency  can  be  shown 
to  be  in  keeping  with  it.  The  tendency  must  be  effective.  When  the 
forces  that  oppose  a  tendency  are  relatively  great,  or  the  mere  obstacles 
in  its  way  relatively  immovable,  the  tendency  cannot  be  assigned  the 
rank  of  a  force  or  be  laid  down  as  an  economic  law,  not  even  a  static 
law.  True,  the  difference  between  an  effective  and  an  inoperative  ten- 
dency is  only  one  of  degree.  This  makes  it  difficult  to  decide  upon  the 
claims  of  a  proposed  law  in  the  particular  case,  but  this  is  a  difficulty 
which  cannot  be  avoided.  The  weaker  the  tendencies  taken  cognizance 


126  LABOR  THEORY  OF  VALUE  [-584 

The  conclusion  is  that  Ricardo  did  not  examine  the  prob- 
lem of  skilled  labor  sufficiently,  and  that  the  work  of  Senior, 
and  especially  of  Cairnes,  shows  that  in  this  problem  there 
resides  a  grave  difficulty  for  the  labor  theory.  Neither 
Senior  nor  Cairnes  took  occasion  specifically  to  point  this 
out  themselves.  To  discover  that  such  is  the  effect  of  their 
writings  becomes  the  task  of  the  historian  of  theory. 
Though  Cairnes  refuses  to  give  the  name  "  cost  "  to  entre- 
preneur's expenses,  at  bottom  his  teaching  means  that  the 
labor  cost  "  philosophy  "  of  value  cannot  be  true,  because 
it  is  in  conflict  with  the  more  certain  "  empirical  "  laws 
of  value. 

of  in  a  given  static  theory,  the  more  idealistic  or  refined  is  that  theory. 
And,  at  least  after  a  certain  point  is  reached,  the  more  refined  the  theory 
becomes,  in  this  sense,  the  less  its  degree  of  validity.  To  illustrate  this, 
we  need  but  to  refer  to  the  present  question  of  skilled  labor.  Through- 
out the  classical  economics  runs  the  idea  that  the  superior  remuneration 
of  skill  really  rewards  the  extra  disutility  necessarily  undergone  in  ac- 
quiring the  skill.  Now,  if  the  movement  of  men  among  occupations 
were  calculated  solely  with  reference  to  this  disutility,  and  were  free 
enough,  the  actual  wage  of  skilled  labor  could  be  said  to  be  adjusted  to 
the  disutility  of  the  occupation,  including  the  past  disutility  of  acquiring 
the  skill.  The  extra  part  of  the  wage  would  be  a  sort  of  interest  on 
disutility  already  expended,  as  suggested  expressly  by  Adam  Smith  and 
by  Senior.  But  we  need  not  pursue  this  idea  into  its  minor  complications. 
The  point  desired  to  be  made  is  that  the  tendency  for  actual  wages  of 
skilled  labor  to  adjust  themselves  to  the  disutility  of  the  skilled  labor  is  so 
submerged  (permit  a  questionable  metaphor)  beneath  other  forces,  that 
it  makes  a  theory  over-refined  to  recognize  it  as  a  law.  I  believe  it  pos- 
sible to  justify  nearly  all  the  older  theories  of  value  by  making  a  static 
state  to  order  for  each  writer,  that  is,  by  making  one  over-refined 
enough.  Put  in  other  words,  so  far  as  the  older  economists  were  not 
guilty  of  self-inconsistencies,  their  theories  could  be  justified  by  grant- 
Ing  them  sufficient  assumptions.  The  latter  is  what  we  refuse  to  do. 
An  example  of  a  legitimate  static  law  is  that  wages  tend  to  equal  the 
specific  value-product  of  labor,  as  contrasted  with  the  theory  that  wages 
tend  to  adjust  themselves  to  the  disutility  of  the  task  performed. 


CHAPTER  XI 

THE    ULTIMATE    RELATION    OF    COST    TO    VALUE 

I.  The  history  contained  in  the  preceding  ten  chapters 
covers  but  a  limited  number  of  English  writers.  At  the 
time  of  writing,  a  short  list  of  economists  was  drawn  up 
in  advance,  which  enumerated  the  thinkers  at  that  time 
generally  regarded  as  the  leaders  in  the  development  of 
the  old  English  political  economy.  It  was  stated  at  the 
outset  that  the  purpose  was  to  review  the  opinions  of 
these  writers  only.  An  endeavor  was  made  to  define 
this  purpose  as  being  to  make  an  intensive  rather  than 
an  extensive  study  of  the  history  of  English  theory.  By 
an  extensive  study  we  should  mean  the  effort  to  discover 
writers  who  have  made  important  contributions  to  the 
thought  the  history  of  which  is  being  traced,  but  have 
been  previously  unrecognized  or  insufficiently  accredited. 
Such  examinations  into  the  history  of  English  economic 
literature  will  probably  in  the  immediate  future  result  in 
important  alterations  in  what  might  be  called  our  accepted 
lists  of  chief  writers.  It  will  be  found  that  thinkers  now 
supposed  to  have  expressed  the  doctrines  of  their  time 
with  the  greatest  clearness  and  power  were  in  some  cases 
surpassed  in  these  points  by  writers  at  present  almost  or 
quite  forgotten.  Or  it  will  be  found  perhaps  that  new 
ideas — such  for  instance  as  the  conception  of  marginal 
utility — really  originated  earlier  than  at  present  supposed. 

A  brief  time  elapsed  between  the  writing  of  the  tenth 
and  the  eleventh  chapters  of  this  essay.  But  in  this  per- 
385]  127 


128  LABOR  THEORY  OF  VALUE  [-586 

iod  there  has  been  published  a  discussion  of  the  work  of 
some  earlier  British  economists,  which  establishes  beyond 
a  doubt  that  the  marginal  utility  theory  of  value  was 
conceived  and  formulated  in  most  excellent  fashion  by 
an  English  writer  as  early  as  1833,  two  decades  before 
Gossen  and  a  generation  before  Menger,  Jevons  and 
Walras.  The  English  writer  was  W.  F.  Lloyd,  Professor 
of  Political  Economy  at  Oxford.  A  full  description  of 
Lloyd's  theory,  with  citations  showing  the  excellence  of 
its  statement,  appeared  in  The  Economic  Journal,  over 
the  signature  of  Professor  Seligman,  of  Columbia  Uni- 
versity.1 Professor  Seligman  has  called  attention  to  still 
another  writer  of  great  consequence  because  of  his  con- 
tributions to  the  theory  of  value.  This  is  Mountifort 
Longfield  who,  as  Professor  Seligman  states,  in  1833 
gave  an  able  exposition  of  what  is  now  the  modern  doc- 
trine of  marginal  demand  and  marginal  cost.* 

Avoiding  the  larger  task  involved  in  the  extensive 
study  of  the  history  of  the  theory  of  value  in  England,  the 
present  monograph  has  endeavored  to  interpret  the  labor 
theory  as  it  passed  through  the  minds  of  some  nine  econ- 
omists beginning  with  Smith  and  ending  with  Cairnes. 
The  history  is  that  of  a  subjective-cost  philosophy  of 
value  and  the  difficulties  of  its  application  to  explain 
the  facts  of  industry.  According  to  this  philosophy,  or 
this  ultimate  explanation,  utility  is  a  condition  essential 
to  the  existence  of  value,  but  cost  or  difficulty  of  attain- 
ment is  the  essence  of  value.  The  idea  was  elucidated  by 
a  variety  of  figures  of  speech.  Utility  was  conceived  as 
a  sort  of  resting-ground  for  value,  but  the  height  of  value 

1 "  On  Some  Neglected  British  Economists,"  Economic  Journal,  v. 
xiii,  pp.  357-363. 
*Ibid.,  p.  527. 


387]  RELATION  OF  COST  TO  VALUE 

upon  this  ground,  the  value  as  an  amount,  was  held  to 
be  determined  by  or  measured  by  cost  of  production. 
Thus  Ricardo  wrote  to  J.  B.  Say : 

The  utility  of  things  is  incontestably  the  foundation  of 
their  value,  but  the  degree  of  their  utility  cannot  be  the 
measure  of  their  value.  .  .  .  The  difficulty  of  [a  thing's} 
production  is  the  sole  tneasare  of  its  value.1 

Karl  Marx  was  accustomed  to  speak  of  value  as  "a 
congelation  of  human  labor,"  and  to  speak  of  a  useful 
object,  or  an  object  made  useful  in  the  process  of  pro- 
duction, as  a  sort  of  receptacle  for  value. 

In  his  involved  "philosophical"  account  of  value,  as 
we  termed  it,  Adam  Smith  taught  that  the  value,  or 
"real  worth,"  of  a  good  is  measured  equally  well  by 
the  amount  of  labor  which  it  has  cost  to  produce,  or 
by  the  labor  which  it  can  command  in  exchange.  When, 
however,  Adam  Smith  turns  his  attention  to  the  proxi- 
mate principles  of  value  in  the  actual  competitive  market, 
we  find  him  confessing  that  the  theory  which  he  first 
developed  applies  without  modification  only  to  a  primi- 
tive state  of  society,  without  land  rent  and  interest  on 
capital.  In  this  primitive  state  the  amount  of  labor 
which  a  commodity  costs  determines  the  amount  of  labor 
which  it  can  command  in  exchange.  Under  the  con- 
ditions of  advanced  society,  the  rent  of  land  and  the 
"profits  of  stock"  must  come  out  of  the  exchange  value 
of  the  product,  and  the  labor  cost  of  the  latter,  which  is 
paid  for  by  wages,  no  longer  determines  its  value.2  If 
we  take  advantage  of  modern  terminology,  and  throw 

1  See  ante,  pp.  44-5.- 

'Adam  Smith  nevertheless  retains  the  "  labor-command"  measure  of 
value  as  applicable  to  the  conditions  of  advanced  society,  for  criticism  of 
which  see  ante,  pp.  30  and  39. 


LABOR  THEORY  OF  VALUE          [388 

Adam  Smith's  theory  into  our  own  words,  we  make  its 
precise  significance  clearer.  It  means  virtually  that  the 
exchange  value  of  a  good  in  the  fully  developed  social 
economy  is  determined  by  its  entrepreneur  s  or  money 
cost  of  production,  so  far  as  it  is  determined  by  cost  at 
all.  Competition  must  be  perfect  to  enable  cost  to  de- 
termine actual  values.  Entrepreneur's  cost  is  composed 
of  expenditures  for  wages  of  the  labor,  rent  of  the  land, 
and  "profits"  of  the  capital  necessary  for  production. 
The  labor  cost  of  producing  the  commodity  determines 
only  the  amount  of  the  wages  cost  to  the  entrepreneur. 
The  other  elements  helping  to  make  the  total  of  entre- 
preneur's cost  are  not  determined  by  the  labor  cost  of 
producing  the  commodity.  Thus  the  exchange  value  of 
a.  good  is  determined  by  its  entrepreneur's  cost,  but  this 
latter  is  not  determined  by  labor  cost,  and  consequently 
the  exchange  value  of  the  good  is  not  determined  by 
Tabor  cost.  The  existence  of  rent  and  interest  destroys 
the  regulation  of  exchange  values  by  labor  cost.  It 
must  be  kept  in  mind  that  all  this  is  very  much  more 
explicit  than  what  Adam  Smith  said.  It  signifies  that 
the  labor-cost  philosophy  of  value  cannot  be  true — per- 
haps Smith  would  say  only  that  it  is  imperfect  or  not 
precisely  true — because  it  is  in  conflict  with  a  more  cer- 
tain empirical  law  of  value,  namely,  the  law  of  entre- 
preneur's cost. 

Ricardo  adopted  the  labor-cost  philosophy  of  value 
virtually  as  a  premise,  and  the  most  important  parts  of 
his  reasoning  on  the  subject  are  concerned  with  remov- 
ing or  minimizing  the  empirical  difficulties  with  this 
philosophy.1  In  the  end  he  admitted  that  interest  is  an 

1  Since  the  chapter  on  Ricardo  herein  contained  was  written,  it  has 
been  suggested  to  the  writer  that  he  is  mistaken  in  attributing  any 


389]  RELATION  OF  COST  TO  VALUE  l^l 

element  in  that  form  of  cost  which  exercises  the  most 
direct  and  compelling  influence  on  exchange  values.  He 
made  concessions,  which  pursued  to  their  logical  out- 
come, signify  that  the  existence  of  interest  throws  the 
exchange  values  of  goods  out  of  proportion  to  their  pure 
labor  costs  of  production.  We  have  seen  how  he  put 
this  concession  in  a  peculiar  and  misleading  manner.1 
As  for  rent  of  land,  Ricardo  hastens  to  repudiate  Adam 
Smith's  admission  that  it  also  is  a  source  of  difficulty  to 
the  labor  theory.  He  gets  rid  of  rent  by  explaining  that 

"philosophical"  account  whatsoever  to  Ricardo,  that  in  fact  Ricardo's 
whole  treatment  is  purely  empirical.  The  writer  cannot  concur  in  this 
judgment.  It  is  admitted  that  Ricardo  virtually  takes  this  philosophy 
for  granted,  instead  of  endeavoring  to  establish  it,  but  the  almost  appal- 
ling confusion  into  which  his  exposition  of  value  falls  when  the  difficulty 
of  interest  is  reached  (see  ante,  chap,  v,  §§  5-9)  can  be  explained,  so  it 
is  believed,  only  according  to  Wieser's  interpretation  of  Ricardo's  work. 
This  is,  namely,  that  he  is  endeavoring  to  force  the  empirical  principles, 
or  the  "facts  "  of  entrepreneur's  cost,  to  fit  the  labor  philosophy.  A 
thinker  who  confined  himself  to  a  purely  empirical  analysis  would  never 
reach  the  labor-cost  thesis  with  which  Ricardo  opens  at  once  his  chapter 
on  value  and  his  Principles  of  Political  Economy,  The  thesis  is  a 
priori,  that  is,  as  contrasted  with  the  theory  of  entrepreneur's  cost.  If 
Ricardo  were  working  with  merely  an  empirical  account  of  value,  and 
were  not  embarrassed  by  an  uncertain  philosophy  of  value,  how  would 
he  ever  come  to  speak  of  the  cost  of  production,  which  determines  value, 
as  consisting  of  "labor  and  profits!"  He  should  say  "wages  and 
profits."  Again,  how  would  he  be  led  to  commence  his  chapter  on 
"  Natural  and  Market  Price,"  by  the  assertion  that  the  market  price  of 
a  commodity  can  deviate  temporarily  from  its  "natural  price,  or  the 
quantity  of  labor  which  it  has  cost!"  No  empirical  theory  would  lead 
to  the  statement  that  the  normal  price  toward  which  competition  forces 
actual  prices  is  a  quantity  of  labor.  This  natural  price  is  Adam  Smith's 
'•philosophical"  natural  price  or  "first  price,"  namely,  labor. 

1  He  stated  it  in  the  form  of  an  admission  that,  besides  changes  in 
labor  cost,  there  can  be  a  second  cause  of  variations  of  the  exchange 
ratios  between  commodities,  namely  a  rise  or  fall  of  the  general.rate  of 
interest.  He  first  stated  the  second  cause  to  be  a  fall  or  rise  of  the 
general  rate  of  wages,  but  in  his  view  this  is  equivalent  to  a  rise  or  fall 
of  "profits,"  i.  e.,  interest.  See  ante,  chap,  v,  §§  7 and  8. 


LABOR  THEORY  OF  VALUE         [390- 

the  exchange  values  of  commodities  are  regulated  by  the 
quantity  of  labor  required  for  production  on  the  least 
fertile  land  in  use,  or  the  quantity  required  to  produce 
the  most  expensive  portions  of  the  supplies.  In  modern 
phraseology,  he  urged  that  it  is  not  the  actual  labor  cost 
of  a  good  but  its  marginal  labor  cost,  which  regulates 
its  value.  Ricardo  himself  used  that  fatally  ambiguous 
formula,  "rent  does  not  enter  into  price."  Having  re- 
moved rent  by  making  the  value  determining  cost  mar- 
ginal, and  having  minimized  the  difficulty  of  interest, 
Ricardo  proceeded  as  if  the  labor  theory  were,  for  the 
sake  of  argument,  intact. 

The  chief  purport  of  the  work  of  Malthus  was,  first, 
to  deny  Ricardo's  right  to  disregard  the  interest  diffi- 
culty and,  second,  to  reaffirm  Adam  Smith's  opinion  that 
land  rent  also  throws  values  out  of  relation  to  labor 
costs.  Turning  now  to  Senior,  who  was  the  next  writer 
to  suggest  a  worthy  and  new  idea,  we  find  that  in  the 
view  of  this  economist  the  existence  of  land  rent  and  in- 
terest as  elements  in  entrepreneur's  cost  is  fatal  to  the 
labor  theory.  But  Senior  explained  interest  as  the  re- 
ward for  abstinence,  just  as  wages  are  the  reward  for 
labor.  In  his  view  labor  and  abstinence  are  independent, 
co-ordinate  elements  in  subjective  cost.1  However,  the 
more  important  idea  that  can  be  extracted  from  Senior's 
reasonings  is  that  wages  as  actually  paid  are  not  in  pro- 
portion to  the  quantities  of  labor  engaged  in  different 
employments.  For  in  his  view  all  skilled  labor  gains  a 
wage  which  really  includes  a  rent  to  "  scarce  natural 
talents."2 

1  Senior — the  attacks  of  Marx  upon  him  notwithstanding — was  far 
from  assigning  to  these  two  elements  equal  ethical  importance. 

'Senior's  rent  to  skill  is  an  entirely  different  form  of  surplus  from 
that  due  to  the  excess  of  utility  produced  above  disutility  incurred  in  the 


39 1  ]        RELATION  OF  COST  TO  VALUE 

Summing  up  the  results  of  Senior's  argument  for  our- 
selves (since  he  himself  did  not  make  the  present  appli- 
cations of  his  doctrines),  the  labor  theory  requires  that 
the  entrepreneur's  costs  of  commodities  should  be  in 
proportion  to  their  labor  costs,  but  entrepreneur's  costs 
are  out  of  proportion  to  labor  costs,  not  only  because 
they  include  rent  of  land  and  interest  on  capital,  but  be- 
cause the  very  payments  of  wages  themselves  may  be  out 
of  proportion  to  the  comparative  amounts  of  labor  em- 
ployed and  remunerated.  When  we  say  that  entrepre- 
neur's costs  are  out  of  proportion  to  labor  costs,  we  do 
not  mean  that  they  are  in  excess  of  wages  cost,  though 
they  are  this,  but  that  for  commodity  A  to  cost  the  same 
quantity  of  labor  as  commodity  B,  is  not  a  sign  that  the 
two  commodities  have  the  same  entrepreneur's  costs. 
In  other  words,  relative  entrepreneur's  costs  are  not  de- 
termined by  relative  labor  costs. 

John  Stuart  Mill  took  Ricardo's  view  of  land  rent  and 
of  interest,  but  took  Senior's  view  that  skilled  labor  oc- 
casions the  entrepreneur  an  expense  out  of  proportion 
to  the  quantity  of  labor  remunerated.  That  is  to  say,  he 

"  earlier  "  parts  of  the  working  day  of  all  labor.  So  long  as  the  length 
of  the  working  day  is  left  to  the  worker  himself,  he  will  stop  when  the 
terminal  utility  and  disutility  are  equivalent.  All  previous  parts  of  the 
day  produce  a  surplus  of  utility.  This  is  the  surplus  which  occupies  an 
important  place  in  J.  B.  Clark's  theory  of  value.  Compare  Marshall's 
"producer's"  and  "consumer's  rents."  Senior's  "rent  to  scarce 
natural  talents"  is  explicable  only  on  the  supposition  that  the^disutility 
endured  and  the  return  of  utility  enjoyed  by  a  skilled  laborer  can  be 
compared  with  the  same  quantities  for  an  unskilled  laborer.  Senior 
means  merely  that  skilled  laborers  obtain  higher  returns  at  lower  sacri- 
fices as  compared  with  unskilled.  A  certain  part  of  the  return  enjoyed 
by  the  skilled  laborer  is  equivalent  to  that  enjoyed  by  the  common 
worker;  the  part  in  excess  of  this  is  the  rent.  Senior  considers  it  analo- 
gous to  the  rent  which  goes  to  lands  of  superior  fertility.  Further  con- 
sideration will  be  given  in  a  later  section  to  the  relation  of  skill  to  the 
labor  theory  of  value. 


LABOR  THEORY  OF  VALUE         [392 

held  that  the  higher  wages  of  skill  do  not  represent  a 
higher  labor  cost.  This  opinion  he  adopted  without  at 
the  same  time  taking  up  Senior's  particular  use  of  the 
term,  "  rent  to  talents."  As  we  concluded  at  the  end  of 
Chapter  IX,  it  may  be  said  that  Mill  followed  Ricardo 
more  closely  than  any  other  of  his  predecessors  on  the 
question  of  the  relation  of  labor  to  value.  Turning  to 
Cairnes  we  note  that  this  writer  gave  one  sentence  in  his 
book  to  the  doctrine  of  land  rent,  and  in  this  he  acqui- 
esced in  the  judgment  of  Ricardo  and  J.  S.  Mill.  But 
Cairnes  adopted  a  position  with  reference  to  interest 
identical  with  that  assumed  by  Senior,  and  his  theory  of 
"  non-competing  groups "  merely  emphasizes  the  claim 
that  the  amount  of  wages  paid  in  different  employments 
is  not  a  test  of  the  quantities  of  labor  employed. 

Taking  the  whole  period  covered  in  this  history,  we 
see  that  a  goodly  number  of  points  of  criticism  were 
raised  against  the  pure  labor-cost  theory.  The  reader 
may  have  noted  that  all  these  points  were  implicit  in  the 
work  of  Senior,  and  in  his  alone.  Does  the  entrepre- 
neur's payment  of  land  rent,  of  interest  on  capital,  and 
his  payment  of  a  superior  wage  to  skilled  labor  (a  wage 
out  of  proportion  to  the  disutility  of  skilled  labor),  make 
impossible  the  theory  that  labor  cost  regulates  value? 
Is  it  not  possible  that  labor  cost  may  be  conceived  in 
some  way,  perhaps  as  "marginal  cost,"  or  "social  mar- 
ginal disutility,"  such  that  the  exchange  values  of  the 
products  of  industry  can  be  shown  to  depend  upon  the 
labor  cost  of  these  products  ?  In  the  following  pages 
the  writer  will  try  to  give  an  answer  to  this  question,  so 
far  as  it  lies  in  his  power.  It  will  be  indispensable  to 
bear  with  a  considerable  number  of  preliminaries.  The 
ultimate  relation  of  cost  (in  any  or  all  of  its  forms)  to 
value,  cannot  be  discussed  with  any  success,  unless  the 


393]  RELATION  OF  COST  TO  VALUE 

parties  to  the  discussion  have  reached  some  understand- 
ing as  to  the  relation  of  utility  to  value  and  as  to  the 
meaning  of  other  proposed  laws  of  value  than  cost  laws. 
Merely  a  moderate  acquaintance  with  the  contemporary 
literature  of  economic  theory  gives  complete  assurance 
that  the  necessary  understanding  just  mentioned  cannot 
be  presumed  to  exist,  but  must  be  established  as  care- 
fully as  possible. 

2.  Historically,  there  have  been  two  distinct  concep- 
tions of  cost — at  least  in  English  political  economy — 
namely,  (i)  labor  cost,  and  (2)  entrepreneur's  cost. 
Logically,  there  are  two  elementary  forms  of  cost,  (i) 
pain  cost,  and  (2)  potentiality  cost.  The  first  consists 
in  the  human  discomforts  or  undesirable  feelings  inci- 
dental to  the  production  of  wealth,  whether  the  disutility 
of  labor,  or  that  of  "abstinence"  or  "waiting."  This  is 
also  frequently  called  "true,"  "real,"  or  "subjective" 
cost.  The  terms  "true"  and  "real"  are  hardly  com- 
mendable, for  the  other  elementary  form  of  cost  is  quite 
as  real  as  this.  The  word  "  subjective  "  is  genuinely  dis- 
tinctive, but  probably  less  so  than  the  generic  term 
"pain." 

The  second  elementary  form  of  cost  is  that  emphasized 
chiefly  by  the  Austrian  writers.  In  the  making  or 
acquisition  of  economic  products,  certain  scarce  agents 
are  either  destroyed,  or  else  for  the  time  being  employed 
in  a  way  that  excludes  their  employment  in  the  produc- 
tion of  other  goods.  We  may  say  that  the  production 
of  any  given  good  involves  the  destruction  of  certain 
productive  agents,  or,  permitting  a  convenient  liberty  of 
expression,  of  the  uses  of  agents  from  which  other  goods 
might  have  been  produced.  Thus  with  the  emergence 
of  one  good  the  possibility  of  some  other  good  is  ex- 
cluded. Professors  von  Wieser  and  Bohm-Bawerk,  who 


LABOR  THEORY  OF  VALUE 


[394 


have  written  the  best  explanations  of  the  relation  of  this 
form  of  cost  to  value,  have  suggested  no  distinctive 
name  for  it.  The  reason  appears  to  be  that  they  con- 
sider this  as  the  only  form  of  cost  which  requires  especial 
explanation,  since,  as  they  hold,  it  is  the  only  kind  of 
-cost  which  can  be  correlated  with  value.  In  an  article 
in  the  Quarterly  Journal  of  Economics?  Professor  D.  S. 
-Green  has  suggested  the  term  "  opportunity  cost  "  for 
the  Austrian  conception.  Professor  H.  J.  Davenport, 
•having  in  mind  the  same  conception,  refers  to  it  as 
"sacrifice  cost."2  Professor  Heinrich  Dietzel  speaks  of 
the  same  cost  as  "  Nutzeneinbusse"*  This  concept  has 
also  in  various  places  been  designated  "social  cost." 
Though  this  cost  is  social  in  a  certain  comparatively 
irrelevant  sense  in  which  the  other  kind  of  cost  is  not 
social,  the  term  "  social  cost"  is  not  a  good  one  because 
it  lacks  distinctiveness.  There  is  nothing  intrinsically 
social  about  potentiality  cost,  nor  would  the  other 
•elementary  form  of  cost,  that  is,  pain  cost,  be  best 
designated  "individual  cost."  Both  forms  would  appear 
in  an  isolated  individual  economy,  for  instance  in  our 
fictitious  but  highly  useful  Crusoe  economy.  "  Sacrifice 
cost  "  is  ambiguous,  because  the  word  "  sacrifice  "  is 
used  as  often  as  not,  though  perhaps  improperly,  to 
signify  the  discomfort  or  pain  endured  in  production. 
A  term  is  needed  to  distinguish  a  form  of  cost  from  pain 
cost.  "Potentiality"  cost  appeals  to  the  writer  as  being 
a  term  somewhat  better  than  "  opportunity  "  cost.  When 
certain  common  production  goods,  capable  of  being 
turned  to  the  making  of  more  than  one  kind  of  thing, 

'January,  1894,  p.  218. 

*In  the  Journal  of  Political  Economy,  vol.  ii,  p.  561. 

•*  Theoretische  Socialokonomik,  1895,  v°l-  i»  P-  2°5- 


395]  RELATION  OF  COST  TO  VALUE 

are  used  up  to  make  a  given  thing,  their  potentiality  to 
make  an  alternative  thing  is  destroyed.  The  potentiality 
cost  of  a  commodity  is  measured  by  the  highest  other 
value  that  might  have  been  obtained  if  this  commodity 
had  not  been  produced  from  the  productive  agents  enter- 
ing into  it. 

If  it  be  correct  that  pain  cost  and  potentiality  cost  are 
the  two  elementary  kinds  of  cost,  what  is  the  relation  of 
the  two  historical  forms  of  cost,  labor  and  entrepreneur's 
cost,  to  these?  Just  as  the  word  labor  stands  for  two 
distinct  things,  toil  and  productive  power,  so  may  "  labor 
cost "  mean  either  pain  cost  or  potentiality  cost.  If  the 
term  labor  cost  is  used  without  a  qualifying  adjective  or 
explanatory  phrase,  it  would  naturally  call  up  in  most 
minds  the  conception  of  pain  cost.  But  labor  force  is 
the  most  disposable  of  all  productive  agencies,  and  when 
the  productive  power  of  labor  (what  the  entrepreneur 
buys)  is  used  up  in  the  production  of  a  given  commodity, 
we  have  a  perfect  example  of  potentiality  cost.  As  we 
have  seen,  Adam  Smith  used  labor  at  different  times, 
both  in  the  sense  of  toil  or  disutility  and  in  the  sense  of 
productive  power  or  potential  commodity.  Ricardo,  to 
the  best  of  the  writer's  knowledge,  said  nothing  to  indi- 
cate definitively  which  of  these  concepts  he  designated 
by  the  term  labor.  In  the  writer's  judgment  the  pre- 
sumption is  that  by  the  labor  cost  which  regulates  the 
exchange  value  of  commodities,  Ricardo  meant  what  we 
call  pain  cost.  At  one  place,  Ricardo  said  "  difficulty  of 
attainment"  is  the  true  measure  of  value.  It  seems 
almost  assured  that  this  must  mean  "  pain  cost."  When 
cost  is  conceived  as  the  ultimate  essence  of  value,  the 
cost  will  almost  certainly  be  pain  cost  or  "real  cost." 
It  is  interesting  to  note  that  Professor  Dietzel,  in  argu- 
ing that  the  Ricardian  labor  theory  of  value  is  perfectly 


LABOR  THEORY  OF  VALUE         [396 

reconcilable  with  all  that  holds  good  in  the  utility 
theory,  states  that  labor  cost  must  be  conceived  solely 
as  "  Nutzeneinbusse"  i.  <?.,  utility-sacrifice,  or  potentiality 
cost.  When  the  labor  theory  is  founded  upon  the  con- 
ception of  labor  as  toil  ("Unlust"),  he  considers  it  to  be 
"  built  upon  sand."  * 

We  see  that  it  is  possible  to  mean  either  pain  or 
potentiality  cost  by  the  words  "  labor  cost."  Labor  as 
"  pain  "  and  labor  as  productive  power  are  not  the  same 
thing  but  the  first  is  incident  to  the  second.  It  remains 
to  consider  the  relation  of  entrepreneur's  expense  to  the 
two  elementary  forms  of  cost.  Torrens  desired  to  ex- 
clude the  money  outlays  of  the  entrepreneur  in  interest 
charges  from  the  money  cost  of  production  of  a  good. 
That  is,  he  maintained  that  what  he  called  "  profits,"  the 
chief  constituent  of  which  was  interest,  is  no  part  of  cost 
of  production.  This  view  was  never  adopted  by  any 
subsequent  economist  of  weight.  The  very  simple  rea- 
sons why  it  is  indefensible  were  mentioned  in  the  chapter 
on  Torrens.  Conceding  then  that  interest  is  a  part  of 
entrepreneur's  cost,  the  relation  of  the  latter  to  "  pain 
cost "  can  be  stated  in  a  few  words.  The  total  "  pain 
cost"  of  any  article,  which  is  produced  by  entrepreneurs, 
finds  its  remuneration  in  those  payments  which  go  to 
make  up  cost  from  the  viewpoint  of  the  entrepreneur. 
The  point  to  be  held  fast,  a  point  already  emphasized,  is 
that  the  subjective  costs  of  goods  so  produced  can  in- 
fluence their  exchange  values  only  by  way  of  influencing 
their  entrepreneur's  costs. 

The  relation  of  entrepreneur's  expense  to  potentiality 

1  Theoretische  Socialokonomik,  1895,  vol.  i,  p.  233.  Dietzel  supposes 
that  Smith  conceived  of  labor  solely  as  "Unlust,"  but  in  this  he  is 
clearly  mistaken.  See  ante,  chapter  iv. 


RELATION  OF  COST  TO  VALUE 

cost  is  less  simple  and  familiar  than  the  foregoing.  It 
will  best  be  taken  up  in  a  subsequent  section  after  we 
have  endeavored  to  state  the  gist  of  the  utility  theory  of 
value.  We  may  conclude  the  present  discussion  of  cost 
concepts  by  noting  that  there  are  several  ways  of  reckon- 
ing or  analyzing  entrepreneur's  cost,  (i)  Adam  Smith's 
method,  adopted  by  Malthus,  is  set  forth  in  the  follow- 
ing definite  words  written  by  the  latter  :  "  The  cost  of 
producing  any  commodity  is  made  up  of  all  the  wages, 
all  the  profits,  and  all  the  rent  which  *  *  *  *  are  neces- 
sary to  bring  that  particular  commodity  to  market  in  the 
quantity  required."1  (2)  Perhaps  the  most  approved 
modern  method  of  analyzing  the  elements  in  entre- 
preneur's cost  is  merely  into  wages  and  interest.  In 
this  case  rent  paid  for  the  use  of  land  is  treated  in  the 
same  way  as  rent  paid  for  buildings  or  for  machinery  or 
power.  (3)  The  most  direct  treatment  of  entrepreneur's 
cost  defines  it  shortly  as  including  the  prices  of  all  the 
productive  agencies  used  up  in  the  making  of  the  pro- 
duct, or  as  the  value  of  raw  material,  machinery,  and 
labor  power  "entering  into"  the  product.  It  is  always 
necessary  to  explain  immediately  that  some  production 
goods  are  in  no  sense  consumed  in  the  making  of  the 
product.  Such  are  the  land  and  buildings.  Some  pro- 
duction goods  are  consumed  only  in  very. small  part  in 
the  making  of  a  single  product.  The  total  money  cost 
of  a  product  is  according  to  one  system  divided  into 
"prime  cost"  and  "establishment  cost."  The  former 
includes  the  prices  of  all  those  elements  which  are  en- 
tirely used  up  in  making  the  product.  The  latter  in- 
cludes the  product's  due  share  of  the  money  cost  of  the 
rest  of  the  establishment,  worn  to  a  certain  extent  or 

1  See  ante,  p.  86. 


I40  LABOR  THEORY  OF  VALUE  [398 

occupied  for  a  time  in  its  making.  Numerous  practical 
formulae  are  in  use  to  aid  in  the  difficult  problem  of 
imputing  to  the  product  its  due  share  in  the  various 
general  charges.  A  second  necessary  explanation  con- 
nected with  the  third  form  of  calculating  entrepreneur's 
cost  is  that,  since  the  prices  of  the  production  goods 
have  to  be  paid  before  the  product  is  finished,  each  price 
must  be  increased  by  interest  for  the  time  of  its  advance, 
to  give  the  complete  cost  of  the  product.  In  order  to 
state  the  relation  of  entrepreneur's  expense  to  potential- 
ity cost,  it  is  not  necessary  to  discuss  in  full  the  mutual 
relations  of  the  various  modes  of  calculating  entrepre- 
neur's cost.  Such  a  discussion  would,  it  seems  to  the 
writer,  involve  us  in  the  theory  of  interest  and  indeed 
in  the  entire  theory  of  distribution.  Fortunately  it  is 
sufficient  for  our  present  ends  to  point  out  that  all  forms 
of  analyzing  entrepreneur's  cost  must  be  based  upon  the 
third,  or,  as  we  might  call  it,  the  practical  method.  If 
it  is  desired  to  reduce  the  cost  of  a  product  to  wages 
and  interest,  the  practical  cost  of  the  article  as  defined 
above  will  have  to  be  ascertained  as  a  starting-point. 
We  will  be  content  in  a  later  section  to  trace  the  con- 
nection between  potentiality  cost  and  the  practical  form 
of  entrepreneur's  cost. 

3.  It  is  impossible  to  give  the  term  value  any  one 
meaning.  The  word  is  so  ambiguous  that  Jevons  advo- 
cated its  abandonment.  The  central  thought  of  the  value 
concept  seems  to  be  capacity  to  excite  desire,  but  there 
are  two  grand  kinds  of  economic  value  which  are  best 
designated,  (i)  exchange  value  and  (2)  esteem  value.1 

;  For  an  excellent  discussion  of  the  term  "  esteem  value"  see  Walsh, 
The  Measurement  of  General  Exchange  Value,  pp.  1-6.  The  writer  is 
greatly  indebted  to  Walsh's  discussion  of  the  value  concept.  The  two 
kinds  of  value  here  distinguished  are  the  same  as  those  designated  ob- 
jective exchange  value  and  subjective  value  by  the  Austrian  writers. 


299]  RELATION  OF  COST  TO  VALUE  I4I 

The  exchange  value  of  an  article  has  often  been  defined 
as  a  ratio — or  specifically,  as  the  ratio  in  which  the  unit 
of  measure  of  the  article  exchanges  for  a  multiple,  or 
fraction,  of  the  unit  of  measure  of  any  other  determinate 
thing ' — and  again  as  the  quantity  of  that  other  thing  for 
which  it  exchanges.  But  both  of  these  conceptions  are 
involved  in  metaphysical  difficulties  which  make  them 
impossible  to  employ  in  actual  reasoning,  and  all  writers 
are  accustomed  to  make  assertions  about  exchange  value 
which  are  not  in  the  least  true  of  these,  their  purely 
formal,  definitions.  Walsh  has  shown  most  clearly  that 
the  only  conception  of  exchange  value  free  from  difficulty 
is  that  of  power  in  exchange.  Exchange  value  is  the 
power  in  a  thing  by  means  of  which  its  owner  is  enabled 
to  command  other  things  possessing  a  similar  power.2 
This  power  is  measured  objectively  by  the  physical  quan- 
tity of  some  other  thing  selected  for  the  purpose,  but  the 
value  is  not  that  quantity,  though  speaking  elliptically  we 
may  say  the  value  of  a  coat  is  twenty  bushels  of  wheat  or 
twenty  dollars.  The  exchanging  power  in  our  daily 
thought  is  always  and  properly  referred  to  the  thing  and 
not  to  the  man  or  owner.  When  the  thing  is  gone  the 
power  is  gone.  The  purchasing  power  of  a  twenty- 
dollar  piece  does  not  reside  in  the  holder.3  It  goes  with- 

1  As,  for  instance,  by  Pantaleoni,  Pure  Economics,  p.  123. 

1  This  definition  by  itself  does  not  of  course  make  clear  the,  ultimate 
source  of  this  power.  For  proximate  and  practical  purposes  the  weight 
of  a  pound  nugget  of  gold  might  well  be  defined  as  its  power  to  counter- 
balance in  the  scales  a  certain  piece  of  metal,  the  standard  troy  pound. 
This  definition  contains  no  hint  of  the  common  source  of  the  counter- 
balancing power  of  both  weights.  In  the  same  way  the  above-given 
definition  of  exchange  value  ignores  a  certain  common  source  of  all  ex- 
change values. 

5  For  a  discussion  of  certain  avoidable  objections  that  have  been  made 
to  the  concept  of  purchasing  power,  see  Walsh,  op.  cit.,  pp.  7  and  8. 


142  LABOR  THEORY  OF  VALUE  [4OO 

out  saying  that  this  power  can  exist  in  an  article  only 
when  there  is  another  thing  for  which  it  can  be  ex- 
changed and  when  there  are  men  to  effect  the  exchang- 
ing. It  is  not  implied  that  articles  of  commerce  have 
the  power  to  exchange  themselves  in  market  places  with- 
out human  intervention.  But  the  purchasing  power  re- 
sides in  the  article;  it  is  always  referred  to  the  article  in 
our  thought,  and  it  leads  to  nonsensical  results  to  run 
counter  to  our  commonest  and  most  practical  forms  of 
thought  and  endeavor  to  locate  it  elsewhere. 

The  end  of  the  theory  of  value  is  to  explain  the  causes 
which  govern  exchange  values,  or  practically,  market 
prices.  Other  conceptions  of  value  than  exchange  value 
derive  their  just  importance  in  political  economy  only 
from  the  aid  they  may  render  in  this  explanation.  This 
defines  the  place  of  the  conception  of  esteem  value.  A 
finished  explanation  of  exchange  values  is  impossible 
without  a  theory  of  esteem  values,  just  as  an  ultimate 
explanation  of  the  counterbalancing  powers  of  different 
objects  in  the  scales  is  vain  without  the  general  law  of 
gravitation.  The  power  of  an  apple  to  counterbalance 
two  eggs  might  have  been  thought  of  as  a  matter  purely 
relative  between  apples  and  eggs,  before  the  general  con- 
ception was  framed  of  the  common  attraction  exerted  by 
the  earth  upon  both  apples  and  eggs.  Exchange  values 
were  once  stated  to  be  "purely  relative."  The  objection- 
able point  in  the  statement  lies  in  the  adverb  "  purely." 
For  exchange  values  are  derived  from  esteem  values  very 
much  as  weights,  or  powers  to  counterbalance,  are  de- 
rived from  the  earth's  attraction.  That  is,  these  two 
derivations  are  generally  similar.  Here  as  elsewhere 
analogies  can  be  pressed  too  far.  The  derivation  of  the 
exchange  values  of  different  goods  in  the  social  market 
from  the  esteem  values  put  upon  these  goods  by  the 


40i]  RELATION  OF  COST  TO  VALUE 

consumers,  or  purchasers  in  the  society,  is  a  process  in- 
definitely more  difficult  to  explain  than  the  relative 
weights  of  ponderables.1  Given  the  gravity  of  separate 
objects  it  is  but  a  step  to  explain  their  relative  weights, 
but  given  the  esteem  values  of  different  economic  com- 
modities it  is  a  long  road  to  follow  the  process  through 
which  these  determine  the  exchange  values  of  the  same 
commodities.  If  esteem  value  be  the  gravity  behind  ex- 
change value,  the  case  is  rendered  complex  in  that  each 
good  possesses  a  separate  esteem  value  for  every  differ- 
ent consumer  whereas  there  is  but  one  earth  to  attract 
each  object  whose  relative  weight  we  desire  to  explain. 

In  the  judgment  of  the  writer,  the  best  definition  of 
esteem  value  is  "  the  significance  (Bedeutung}  which  con- 
crete goods  attain  in  our  estimation  when  we  realize  that 
we  are  dependent  upon  them  for  the  satisfaction  of  some 
want."  This  is  a  loose  translation  of  the  definition 
formulated  by  Carl  Menger  in  1871. 2  The  individual 
good  attains  value  not  simply  when  it  is  capable  of  af- 
fording us  satisfaction,  but  when  it  conditions  the  satis- 
faction. Goods  existing  in  superfluity  give  satisfactions 
but  do  not  condition  them,  hence  any  unit  of  such  goods 
possesses  no  value.  The  removal  or  destruction  of  a 
unit  occasions  the  loss  of  no  satisfaction.  Menger's 

'It  takes  little  discernment  to  see  that  this  statement  is  not  equivalent 
to  saying  that  the  formulation  of  a  theory  of  value  is  a  greater  accom- 
plishment than  was  the  formulation  of  the  law  of  gravitation.  The 
writer  does  not  plead  guilty  to  implying  that. 

'See  Grundsdtze  der  Volksivirthschaftslehre,  Wien,  1871,  p.  78. 
"  Der  Werth  ist  die  Bedeutung,  welche  concrete  Giiteroder  Giiterquan- 
titaten  fur  uns  dadurch  erlangen,  dass  wir  in  der  Befriedigung  unserer 
Bediirfnisse  von  der  Verfiigung  iiber  dieselben  abhangig  zu  sein  uns 
bewusst  sind."  Menger  gives  this  as  a  definition  of  value  simply,  but 
it  is  of  course  a  definition  of  that  particular  kind  of  value  which  we  .have 
agreed  to  call  "esteem  value." 


144  LABOR  THEORY  OF  VALUE  [402 

definition  was  a  triumph  of  theory  in  stating  the  relation 
of  value  to  human  satisfaction  and  to  utility. 

The  law  of  marginal  utility  is  but  a  corollary  of  the 
principle  involved  in  this  definition.  The  utility  of  a 
good  is  its  power  to  afford  satisfaction.1  When  goods 
occur  in  stocks  of  like  units  the  phenomenon  of  "mar- 
ginal "  utility  emerges.  As  the  stock  of  such  goods  to 
be  used  by  a  consumer  within  a  given  time  is  increased, 
the  satisfaction  afforded  by  each  successive  unit  declines.2 
The  actual  utility  of  each  successive  increment  is  lower 
than  the  actual  utility  of  the  preceding  increment.  The 
actual  utility  of  the  last  or  marginal  increment  is  the 
"  marginal "  utility  of  any  of  the  increments.  The  rea- 
son why  the  value  of  any  such  increment  is  determined 
at  the  height  of  its  "marginal"  utility  is  only  because 
any  one  increment  conditions  merely  the  satisfaction 
afforded  by  the  last  or  marginal  increment.  Remove  or 
destroy  any  increment  and  rationally  only  the  satisfaction 
of  the  marginal  increment  will  be  given  up.  In  effect 
any  increment  is  the  marginal  one.  Thus  the  law  of 
marginal  utility  is  not  the  fundamental  law  of  value. 

1  Of  course  this  power  in  the  good  exists  only  in  relation  to  some 
human  being.  It  is  perfectly  true  that  the  good  would  have  no  such 
power  if  there  were  no  man  to  use  it,  and  that  its  power  may  change  as 
the  condition  of  the  man  using  it  is  changed,  and  that  its  power  over 
one  man  is  different  from  its  power  over  another.  For  these  reasons, 
utility  has  often  been  declared  to  be  subjective,  as  if  it  resided  in  the 
mind  of  the  man.  Whether  it  is  subjective  or  objective  depends  pre- 
cisely upon  what  one  means  by  these  terms.  Practically  we  may  say 
that  our  habitual  thought  correctly  refers  the  utility  to  the  good  and 
conceives  it  as  an  attribute  belonging  to  the  good  in  virtue  of  its  com- 
mon physical  properties.  The  utility  of  the  good  does  not  exist  in  the 
mind  except  in  the  sense  in  which  all  things  exist  in  the  mind.  We 
should  at  least  say  that  utility  has  objective  reference.  The  satisfaction 
belongs  to  the  mind,  the  utility  to  the  good.  The  utility  is  a  sort  of 
objective  counterpart  or  projection  of  the  satisfaction. 

'"  Gossen's  law." 


403]  RELATION  OF  COST  TO  VALUE 

Menger's  definition  contains  this  fundamental  law  and 
gives  a  universal  principle  of  value.  The  theorem  that 
value  depends  upon  marginal  utility  is  merely  a  deduc- 
tion from  this  fundamental  principle,  and  is  of  limited 
scope,  since  it  applies  only  where  there  are  goods  in 
stocks.1 

An  absolutely  essential  point  to  be  kept  in  mind  is 
that  the  value  of  an  object  is  not  derived  from  the  sacri- 
fice made  to  obtain  it.  On  the  contrary  we  make  the 
sacrifice  because  the  object  has  this  value.  The  value  is 
first,  the  sacrifice  second.  The  only  means  of  estimating 
how  much  sacrifice  or  discomfort  we  can  afford  to  un- 
dergo to  obtain  an  object  is  by  judging  its  value  to  us 
previously  to  and  independently  of  the  sacrifice.  If  the 
labor  cost,  say,  determined  the  value,  we  could  expend 
labor  cost  regardlessly  in  producing  any  objects  whatso- 
ever. But  this  is  just  what  we  cannot  do.  We  must 
have  a  care  when  we  expend  labor.  A  care  for  what? 
For  the  value  of  the  result.  The  value  of  the  object  is 
derived  from  the  satisfaction  which  it  can  afford,  but  it 
is  attributed  to  the  object  only  when  it  is  the  indispen- 
sable condition  of  that  satisfaction. 

When  a  particular  object  conditions  some  satisfaction 
of  ours,  it  possesses  a  superior  power  over  our  welfare 
to  that  possessed  by  a  good  which,  while  it  affords  us 
satisfaction,  does  not  condition  it.  It  would  be  a  waste 
of  energy  to  spend  it  in  producing  or  conserving  the 
thing  of  inferior  power.  The  ultimate  reason  why  our 

1  That  is,  it  applies  only  where  goods  are  held  in  stocks  by  individual 
consumers.  Thus  the  "esteem  "  value  of  a  piano  commonly  has  noth- 
ing to  do  with  "marginal"  utility.  Only  if  consumers  were  to  own 
pianos  in  stocks — to  use  several  at  once — would  there  be  grounds  for 
speaking  of  the  marginal  utility  of  a  piano.  For  further  consideration 
of  this  point  see  the  next  section. 


146  LABOR  THEORY  OF  VALUE  [404 

minds  instinctively  assign  a  superior  importance  to  the 
things  of  higher  power  over  our  welfare  is  that  such 
instincts  contribute  to  our  fitness  in  the  struggle  for 
existence.  The  things  of  lower  rank  possess  merely 
utility.  The  things  of  higher  rank  possess  a  superior 
power  which  we  recognize  and  distinguish  as  value. 
Lack  of  this  distinction  would  lead  to  a  waste  of  energy 
in  the  modifications  which  we  effect  in  our  environment.1 
4.  Let  us  consider  now  the  essential  features  of  the 
utility  theory  of  value.  According  to  this  doctrine  the 
sole  source  of  value  is  human  satisfaction.  The  thought 
is  well  conveyed,  though  the  expression  may  be  somewhat 
loose,  by  saying  that  the  only  inherently  valuable  thing  is 
satisfaction,  and  that  the  value  of  satisfaction  is  passed 
out  to,  or  attributed  to,  any  external  object  upon  which  the 
satisfaction  is  dependent.  Human  satisfactions  are  quan- 
tities, for  they  are  capable  of  being  more  or  less.  But 
they  are  inexact  and  wavering  quantities.  Similarly,  the 
esteem  values  of  goods,  derived  from  the  satisfactions  con- 
ditioned by  these  goods,  are  quantitative,  but  are  incapable 
of  exact  or  constant  numerical  expression.  The  exchange 
values  of  goods  are  exact  and  relatively  constant  quantities. 
Nevertheless,  exchange  values  are  assuredly  founded  upon 
esteem  values.  The  description  of  the  process  by  which 
these  wavering  and  more  or  less  uncertain  esteem  values 
determine  the  exact  and  definite  exchange  values  of  goods, 
is  perhaps  the  most  difficult  part  of  the  utility  theory.  But 

1  Professor  v.  Wieser  explains  that  the  reason  why  we  attribute  a 
superior  importance  to  a  good  that  has  marginal  utility  as  compared 
with  a  good  that  is  superabundant,  is  because  we  have  a  ' '  natural  in- 
difference" toward  goods  in  general,  which  can  only  be  overcorre 
when  the  good  is  so  scarce  that  its  absence  would  decrease  our  satisfac- 
tions. Natural  Value,  p.  29.  This  would  seem  to  be  explaining  the 
thing  by  itself.  The  ultimate  origin  of  this  "  natural  indifference  "  is 
what  calls  for  explanation. 


405]  RELATION  OF  COST  TO  VALUE 

without  this  part — commonly  called  the  "  theory  of  price  " 
— the  utility  doctrine  remains  a  mere  torso. 

Bohm-Bawerk's  theory  of  price  is  the  only  attempt  that 
has  been  made  to  complete  the  utility  theory  in  this  direc- 
tion, which  is  at  once  well  known  and  authoritative.1 
Though  the  fundamental  lines  of  this  explanation  are  cor- 
rect, it  is  in  externals  at  least  defective  in  two  noteworthy 
respects.  In  the  first  place,  one  of  its  principal  assump- 
tions is  untrue  to  the  typical  conditions  of  exchange  under 
the  division  of  labor.  This  assumption  consists  in  sup- 
posing that  sellers'  subjective  valuations  are  effective  fac- 
tors in  determining  price  in  the  market  of  an  organic 
society.  In  Bohm-Bawerk's  theory,  the  reader  will  recall, 
the  miniature  but  supposedly  typical  market  is  assumed  to 
consist  of  a  number  of  sellers  owning  horses  and  a  number 
of  buyers  desiring  them.  The  first  step  in  the  argument 
is  to  assign  a  money  expression  to  the  esteem  or  "  subjec- 
tive "  value  of  a  horse  to  each  buyer  and  each  seller.  Then 
if  these  money  expressions,  or  "  price  equivalents,"  are 
higher  for  some  one  buyer  than  for  some  one  seller  an 
exchange  of  money  for  a  horse  is  possible  between  the 
two.  If  buyer  B  values  a  horse  at  $45  and  seller  S  at 
$40,  B  can  afford  to  part  with,  and  S  can  afford  to  take 
for  a  horse  any  sum  of  money  over  $40  and  under  $45. 
By  considering  all  the  price  equivalents  of  sellers  on  one 
side  and  of  buyers  on  the  other  side,  Bohm-Bawerk  shows 
us  that  for  every  given  combination  of  such  figures  in  a 
market  there  is  a  certain  definite  number  of  sales  possible, 
and  these  sales  must  take  place  at  a  price  fixed  between 
the  price  equivalents  of  the  last  buyer  and  the  last  seller. 
In  other  words,  the  market  price  will  be  fixed  between  the 
money  valuations  set  upon  a  horse  by  the  "  marginal  pair." 

1  Positive  Theory  of  Capital,  book  iv,  especially  chap.  iv. 


148  LABOR  THEORY  OF  VALUE  [406 

The  region  so  delimited  by  the  marginal  pairs  becomes 
narrower  as  the  number  of  buyers  and  sellers  entering  the 
market  increases.  Thus,  in  a  large  market  the  price  is 
virtually  determined  to  a  point.  The  difficulty  with  this 
theory  is  that  under  the  division  of  labor,  sellers  make 
products  for  the  market,  in  view  of  the  market  price,  and 
make  them  in  numbers  and  keep  them  in  stocks  far  in 
excess  of  their  own  needs.  Under  the  division  of  labor, 
the  lowest  price  at  which  a  seller  will  part  with  a  commod- 
ity is  not  set  by  the  marginal  utility  or  subjective  value 
of  the  commodity  to  him.  A  theory  of  price  applicable  to 
the  modern  market  must  not  employ  the  subjective  valua- 
tions of  sellers  as  a  factor  in  price  determination. 

In  the  second  place,  Bohm-Bawerk's  theory  of  price  is 
misleading,  since  it  obscures  the  fact  that  the  Austrian 
theory  of  value  always  assumes  the  supply  of  the  goods 
whose  value  it  is  to  explain.  The  Austrian  writers  them- 
selves teach  us  that  the  value  of  a  good  depends  upon  the 
supply  of  it.  The  theory  of  marginal  utility  explains  very 
well  why  an  increase  of  supply  lowers  value  or  a  decrease 
raises  value.  But  if  there  should  be  any  cause  which  limits 
or  regulates  the  supply  of  goods  with  reference  to  their 
value,  by  some  kind  of  an  adjustment  to  value,  this  cause 
would  be  both  a  cause  and  a  regulator  (or  at  least  a  part 
regulator)  of  value.  Cost  of  production  in  some  ultimate 
form  is  by  many  writers  supposed  to  be  such  a  cause.  The 
human  "  pain  cost  "  of  producing  goods  is  of  equal  im- 
portance in  theory  with  the  human  pleasure  gain  had  from 
utilizing  the  goods.  The  value  of  an  addition  to  the  stock 
of  a  given  sort  of  goods  always  furnishes  a  motive  for  the 
increase  of  the  stock.  Any  cause  which  limits  the  supply 
at  a  certain  point  in  the  face  of  this  human  desire  for  the 
increase  is  a  cause  of  value.  True,  it  is  a  cause  more  re- 
mote than  utility,  but  still  a  cause  of  value.  Since  the 


407]  RELATION  OF  COST  TO  VALUE 

Austrian  writers  virtually  ignore  the  cause  or  causes  gov- 
erning supply  (and  thus  governing  or  helping  to  govern 
marginal  utility  itself),  the  doctrine  of  price  which  they 
advance  ought  to  rest  openly  and  squarely  upon  the  assump- 
tion that  the  supply  of  the  good  is  taken  for  granted.  In 
Bohm-Bawerk's  theory  of  price,  the  total  supply  of  horses 
in  the  miniature  market  is  simply  assumed,  not  accounted 
for.1  If  horses  were  more  plentiful  in  this  market  the 
sellers'  price  equivalent  would  be  lowered  and  the  market 
price  would  turn  out  lower.  It  is  a  fair  criticism  that 
Bohm-Bawerk  obscures  the  important  point  of  the  depend- 
ence of  price  upon  supply,  by  assigning  sellers  and  buyers 
an  arbitrary  series  of  money  valuations  as  the  very  first 
step  in  his  argument. 

The  "  theory  of  price,"  as  the  Austrians  call  that  part 
of  their  theory  which  traces  the  connection  between  con- 
summers'  "  subjective  "  values  and  market  exchange  values, 
must  begin  with  a  clear  recognition  that  the  pure  utility 
theory  of  value  assumes  outright  the  extent  of  the  sup- 
plies of  all  goods.  Let  us,  then,  inquire  first  how  the  price 
of  a  given  supply  of  consumption  goods  is  determined.2 

1  As  Professor  Macvane  exclaims,  the  Austrians  seem  to  reason  as 
if  the  good  fairies  determined  what  the  supply  of  commodities  shall  be. 
See  The  Quarterly  Journal  of  Economics,  vol.  v,  p.  24.     Concerning 
Professor  Macvane's  general  attacks  on  the  Austrian  position,  it  is  only 
fair  to  say,  however,  that  he  appears  in   the  main  issues  entirely  to 
miss  the  point  of  the  utility  theory.     See  also  the  same  journal,  vol.  vii, 
p.  255,  and   the  Annals  of  the  American  Academy  of  Political  and 
Social  Science,  vol.  iv,  p.  348. 

2  This  enquiry  must  constitute  the  first  part  of  the  theory  of  ex- 
change value,  since  it  is  quite  beyond  dispute  that  cost  in  any  form 
can  influence  exchange  value  only  by  influencing  supply.    Value  will 
rest  at  the  level  of  cost  only  when  the  supply  of  the  good  is  at  just 
the  proper  point.    When  the  supply  is  at  any  other  point,  as  in  the 
case  of  monopolies,  value  no  longer  rests  at  the  level  of  costs.     But 
value  is  still  determined  by  certain  other  influences.    The  description 
of  these  is  the  first  problem. 


150  LABOR  THEORY  OF  VALUE 

If  a  certain  supply  of  some  consumption  good  is  presented 
for  sale  in  the  social  market,  there  is  theoretically  some 
one  price  at  which  just  this  amount  of  goods  can  be  sold. 
Following  Professor  Marshall,  we  may  call  this  the  "social 
demand  price."  At  a  higher  price,  only  a  less  supply  could 
be  disposed  of.  At  a  lower  price  more  could  be  sold.  The 
competition  of  buyers  ultimately  prevents  this  lower  price 
being  set.  The  dependence  of  the  social  demand  price  of 
a  given  supply  of  goods  upon  the  esteem  value  of  these 
goods  to  the  consumers  in  the  social  market  may  be  traced 
as  follows : 

( i )  From  esteem  values  to  price  equivalents.  The  sum 
of  money  which  a  consumer  would  pay  for  the  addition 
of  an  article  to  his  possessions  rather  than  go  without  that 
article  is  called  its  price  equivalent.  The  price  equivalent 
must  not  be  confused  with  the  price  he  may  pay  actually 
to  buy  the  article,  namely,  the  market  price.  A  piano  may 
have  a  market  price  of  $600,  but  have  a  price  equivalent 
of  $1,000  to  A.  If  the  market  price  of  pianos  were  to 
ascend  to  $1,000,  A  would  still  purchase  one.  But  more 
than  $1,000  he  would  not  pay.  When  A  assigns  to  a 
piano  a  price  equivalent  of  $1,000,  this  sum  of  money,  of 
course,  has  significance  merely  as  the  representative  of  the 
indefinite  variety  of  other  goods  which  A  supposes  to  be 
within  the  command  of  $1,000.  Thus  A's  ability  to  think 
out  price  equivalents  depends  upon  the  already  existing  ex- 
change value  of  money,  or,  in  other  words,  upon  prices  them- 
selves. If  the  market  prices  of  carpets,  carriages,  wines 
and  other  things  were  different  from  what  they  are,  the 
amount  of  other  things  commanded  by  $1,000  would  be 
altered,  and  assuredly  A's  price  equivalent  for  a  piano 
would  change.  Thus  the  price  equivalent  of  one  thing  can 
be  named  only  in  view  of  previously  existing  scales  of 
market  prices  of  other  things.  A  consumer  comes  to  form 


409]  RELATION  OF  COST  TO  VALUE  I5I 

a  conception  of  the  significance  of  a  unit  of  money  to  his 
welfare.  Into  the  question  of  the  inner  nature  of  this  con- 
ception we  cannot  afford  here  to  push  our  inquiry.  With- 
out this  conception  he  could  not  set  price  equivalents.  It 
is  merely  a  matter  of  experience  that  in  fact  consumers  do 
set  price  equivalents.  The  sole  possible  explanation  of  the 
fact  that  when  a  monopoly  raises  the  price  of  a  consumption 
good  the  sales  of  it  decline,  is  that  some  buyers  have  been 
excluded  because  the  price  asked  for  has  passed  above  their 
price  equivalents.1  The  worth  of  money  to  a  consumer 
depends  upon  the  extent  of  his  money  income.  Thus  the 
price  equivalent  set  upon  a  good  by  any  consumer  depends 
(i)  upon  the  esteem  value  of  that  good  to  him,  and  (2) 
upon  the  extent  of  his  money  income.  Given  a  consumer's 
money  income,  his  price  equivalents  for  various  articles 
will  be  determined  by,  and  be  in  proportion  to,  the  esteem 
values  those  articles  have  for  him. 

(2)  From  price  equivalents  to  market-price.  The  price 
at  which  a  given  supply  of  a  certain  good  can  be  sold  to 
a  body  of  consumers  is  a  resultant  from  their  individual 
price  equivalents  for  this  good.  It  is  in  no  sense  an  aver- 
age or  mean  of  these  price  equivalents.2  This  is  best  un- 
derstood by  imagining  the  supply  of  the  good  offered  in 
the  market  to  be  increased  by  one  unit.  This  extra  unit 
must  be  added  to  some  person's  stock.  It  will  go  normally 
to  the  person  who  will  pay  the  most  for  it,  but  the  price 
of  the  unit  will  have  to  be  lowered  sufficiently  to  bring  it 
down  to  this  person's  price  equivalent  for  a  unit.  In  the 

1  If  the  good  be  of  a  kind  held  by  consumers  in  stocks,  it  should  go 
without  saying  that  instead  of  a  buyer  being  entirely  excluded  by  a 
rise  of  price,  only  the  marginal  increments  of  his  purchases  may  be 
excluded. 

2  Employing   Professor   Marshall's   terminology   we   would   say  that 
the  "social  demand  schedule"  is  a  resultant  from  combining  all  the 
"individual  demand  schedules." 


1 52          LABOR  THEORY  OF  VALUE          [4IO 

open  market,  then,  the  prices  of  all  units  will  have  to  be 
lowered  to  the  level  of  the  price  of  this  unit.  This  illus- 
trates the  way  in  which  the  social  demand  price  of  a  given 
supply  of  goods  is  determined  at  some  individual  price 
•equivalent.  The  price  of  a  given  supply  is  determined  at 
the  point  of  a  marginal  individual  price  equivalent. 

In  the  last  section  it  was  asserted  that  unless  a  good 
is  possessed  in  a  plurality  of  units,  that  is,  in  a  stock,  by 
the  individual  consumer,  its  value  will  not  be  determined 
by  marginal  utility.  The  Austrian  writers  have  made  this 
perfectly  clear,  but  there  are  innumerable  places  in  the 
literature  which  has  sprung  up  about  the  Austrian  theory, 
either  expounding  or  criticizing  it,  where  the  value  of  such 
a  good  as  a  piano  or  a  furnace  is  said  to  depend  on  mar- 
ginal utility.  Let  us  suppose  that  no  person  possesses  more 
than  one  piano.  In  this  case,  properly  speaking  there  is 
nothing  marginal  about  the  value-determining  utility  of  a 
piano.  There  are,  howrever,  two  methods  in  vogue  of  dis- 
covering an  alleged  marginal  utility  in  such  a  single  unit 
commodity.  The  first  is  to  point  out  that  a  piano  may 
serve  several  uses.  For  instance,  it  may  be  used  to  pro- 
duce music  and  also  as  an  ornamental  piece  of  furniture. 
It  is  then  suggested  that  one  of  these  uses  is  greater  or 
less  than  the  other  and  is  marginal.  Some  suggest  by  im- 
plication or  directly  that  it  is  the  least  use  to  which  a  piano 
is  put  which  determines  its  value  to  the  owner.  If  it  should 
be  suggested  in  reply  that  a  piano  might  be  used  to  conceal 
a  discolored  place  in  the  wall,  which  could  equally  well  be 
done  by  a  two-dollar  screen,  the  probable  reply  would  be 
that  it  is  only  the  least  use  to  which  the  piano  can  be  put 
economically  which  determines  its  value.  Even  so  acute 
a  writer  as  Smart *  is  guilty  of  this  perversion.  When  it 

1  See  his  Introduction  to  the  Theory  of  Value,  p.  37. 


4II]  RELATION  OF  COST  TO  VALUE 

is  in  the  pursuit  of  such  margins,  the  mind  is  far  adrift 
from  the  true  logic  of  the  utility  theory.  When  a  piano 
is  actually  used  to  cover  a  piece  of  wall,  this  is  assuredly 
an  "  economic "  use  of  the  article.  This  use  does  not 
exclude  or  hamper  any  of  its  other  uses.  It  is  true 
no  one  would  pay  $600  for  a  piano  merely  to  cover  a  bad 
piece  of  wall,  but  very  likely  few  would  pay  that  sum  for 
any  one  use  of  the  piano.  The  truth  is,  the  value  of  a 
piano  to  its  user  depends  upon  the  sum  of  its  uses  to  him. 
The  value  of  the  piano  measures  the  total  amount  of  satis- 
faction conditioned  upon  its  possession.  When  goods  are 
used  in  stocks  any  one  unit  conditions  only  the  satisfaction 
had  from  the  last  unit.  Thus  only  does  marginal  utility — 
the  actual  total  utility  of  the  marginal  increment  —  de- 
termine value.  It  is  quite  futile  to  attempt  to  distinguish 
between  the  different  uses  of  a  unit  commodity  and  arrange 
these  in  a  descending  scale  and  choose  a  marginal  use. 
When  the  unit  is  taken  away  all  these  uses  would  be  sacri- 
ficed. Professor  Dietzel,  an  undiscerning  critic  and  imi- 
tator combined  of  the  Austrians,  has  stated  that  it  is  the 
"  highest  use,"  the  use  on  the  upper  margin,  which  deter- 
mines the  value  of  a  unit  commodity. I 

A  second  method  of  discovering  a  marginal  utility  for 
a  piano  is  to  conceive  of  the  utility  of  a  piano  to  that  pos- 
sessor who  has  just  been  able  to  afford  the  price  as  the 
marginal  utility  of  pianos.  All  men  pay  the  same  price 
for  a  given  grade  of  piano,  but  the  rich  men  have  much 
higher  price  equivalents  than  the  poor.  If  the  supply  of 
pianos  to  be  sold  in  a  given  social  market  be  increased, 
the  price  will  fall.  This  fall  is  interpreted  as  being  caused 
by  a  decline  in  the  "  marginal  utility  "  of  pianos.  There 
is  no  justification  for  this  logic  in  the  utility  theory.  It  is 

1   See  his   Thcoretischc  Socialokonomik,   1895,  p.  282. 


154 


LABOR  THEORY  OF  VALUE 


not  possible  to  compare  the  satisfactions  had  from  pianos 
by  different  persons.  It  is  not  possible  to  imagine  the 
pianos  in  society  arranged  in  a  series,  the  pianos  of  highest 
utility  being  those  held  by  the  persons  who  could  afford 
to  pay  most  and  so  on.  The  price  of  a  piano  depends 
upon  the  marginal  price  equivalent  of  a  piano,  but  neither 
the  exchange  value  nor  the  esteem  value  of  a  piano  depends 
upon  marginal  utility. 

To  conclude,  all  goods  derive  their  exchange  values  from 
the  esteem  values  placed  upon  them  by  consumers.  The 
exchange  value  of  a  good  in  money  is  determined  in  a 
marginal  manner  by  the  price  equivalents  set  upon  the 
good  by  the  consumers.  Since  the  extent  of  a  consumer's 
money  income  helps  determine  the  price  equivalents  placed 
upon  all  articles  by  him,  it  is  impossible  to  show  that  these 
price  equivalents  depend  solely  upon  esteem  values.  But 
it  is  still  proper  to  say  that  the  esteem  value  of  a  good 
is  the  sole  source  of  its  exchange  value.  A  consumer  will 
assign  no  price  equivalent  to  a  good  unless  it  possess 
esteem  value,  and  when  he  does  assign  a  price  equivalent, 
it  will  be  precisely  in  proportion  to  the  esteem  value  of  the 
good  as  compared  with  other  goods  which  he  values. 

The  price  of  a  commodity  is  a  definite  and  fairly  stable 
quantity,  e.  g.,  the  price  of  an  oil-stove  is  $4.50.  Is  it 
possible  that  this  definite  price  can  be  said  to  be  determined 
by  the  utility  of  oil-stoves  to  consumers?  Consumers  can- 
not reduce  their  estimates  of  the  utility  of  articles  directly 
to  figures.  But,  nevertheless,  a  consumer  can  determine 
upon  a  sum  of  money  whose  general  purchasing  power  he 
considers  approximately  equivalent  to  the  value  of  an  oil- 
stove  to  him.  The  value  of  the  oil-stove  is  a  wavering 
quantity,  but  having  struck  a  money  estimate  on  the  basis 
of  that  value,  taking  it  for  what  it  is  at  the  instant  of  the 
decision,  this  money  sum  is  a  definite  something  that  will  be 


413]  RELATION  OF  COST  TO  VALUE 

carried  in  mind  as  such  though  the  value  is  indefinite  and 
wavering.  Given  these  definite  "  price  equivalents  "  the 
definite  market  price  is  a  resultant  from  them.  The  market 
price  of  a  good  is  a  sort  of  social  institution  and  has  the 
momentum  or  stability  of  such  an  institution.  Being  once 
determined,  it  will  not  waver  as  do  the  numberless  indi- 
vidual estimates  of  "  esteem  value "  upon  which  it  is 
founded. 

5.  If  a  commodity  fetching  a  definite  and  exact  price, 
as  for  instance  an  oil-stove  selling  for  $4.50,  is  produced 
under  competitive  conditions,  the  apparent  and  proximate 
reason  why  the  article  has  this  particular  price  is  because 
it  costs  its  manufacturer  about  this  sum  of  money  to 
produce  it.  Putting  aside  the  complications  due  to  the  fact 
that  competition  frequently  takes  place  between  firms  pro- 
ducing at  different  costs,  the  commonest  law  of  exchange 
value,  stated  in  the  usual  language,  is  that  price  is  "  de- 
termined by  "  entrepreneur's  cost  of  production.  Whether 
entrepreneur's  cost  is  reckoned  in  terms  of  wages,  interest, 
and  rent;  wages  and  interest  alone;  or  in  terms  merely 
of  the  prices  of  all  the  production  goods  "  entering  into  " 
the  product,  the  law  of  entrepreneur's  cost,  as  stated  above, 
reduces  itself  to  the  proposition  that  the  exchange  value 
of  production  goods  "  determines  "  the  exchange  value  of 
products.  For  all  forms  of  calculating  entrepreneur's  costs 
are  based  on  the  simple,  practical,  or  first  method  of  reck- 
oning costs,  as  the  prices  of  labor,  raw  material,  machin- 
ery, power,  etc.1 

There  is  seeming  antagonism  between  the  law  of  en- 
trepreneur's cost  and  the  utility  theory  of  value.  For, 
according  to  the  latter,  the  value  of  production  goods  is 
derived  solely  from  the  value  of  their  products.  Value 

v  As  pointed  out  in  section  2  of  this  chapter. 


156          LABOR  THEORY  OF  VALUE 

originates  in  human  satisfaction,  flows  out  to  those  con- 
sumption goods  upon  which  the  satisfaction  is  immediately 
dependent  (i.  e.,  by  which  it  is  conditioned),  from  these 
flows  out  to  the  production  goods  upon  which  the  con- 
sumption goods  as  products  are  dependent  for  their  exist- 
ence. From  these  on,  the  flow  of  value  continues  to  those 
production  goods  which  are  still  farther  removed,  and  so  on, 
rank  by  rank,  until  unproduced  agents  are  reached.  Put 
in  other  words,  raw  material,  machinery  and  similar  goods, 
have  value  solely  because  the  entrepreneur  can  afford  to 
pay  for  them,  and  this  he  can  do  solely  because  his  products 
have  value.  If  value  conduction  runs  from  product  to  pro- 
duction goods,  how  can  value  determination  run  in  the 
reverse  direction,  from  production  goods  to  product?  If 
the  stream  runs  from  the  spring,  we  know  that  the  volume 
of  the  spring  must  determine  the  volume  of  the  stream  and 
not  the  contrary.  But  does  not  the  law  of  entrepreneur's 
cost  assert  that  the  value  of  production  goods  determines 
the  value  of  products?  The  solution  of  the  enigma  of  this 
apparent  conflict  of  the  utility  theory  with  the  great  em- 
pirical law  of  cost  (in  its  common  form  of  statement)  is 
one  of  the  most  interesting  and  important  products  of  the 
acute  thinking  of  the  Austrian  economists. 

The  difficulty  exists  solely  because  many  single  produc- 
tion goods,  such  for  example  as  iron  and  wood,  or  pre- 
eminently common  labor,  enter  into  a  variety  of  products. 
When  several  various  products  are  related  to  one  another 
by  reason  of  the  fact  that  a  common  production  good 
enters  into  all  of  them,  we  may,  following  von  Wieser, 
call  them  "  cognate  products."  If  cognate  products  A,  B, 
and  C  are  made  in  part  from  the  common  production  good 
P,  P  will  derive  its  value  from  the  values  of  A,  B,  and  C, 
but  the  value  of  P  itself  will  have  a  peculiar  reactionary 


415]  RELATION  OF  COST  TO  VALUE 

effect,  yet  to  be  described,  upon  the  value  of  these  products 
taken  individually.  This  reaction  is  the  phenomenon  really 
at  the  foundation  of  the  law  of  entrepreneur's  cost.  For 
an  instant  permit  a  supposition  quite  contrary  to  fact. 
Suppose  that  A,  B,  and  C  are  made  entirely  from  P  so 
that  no  other  production  good  enters  into  them.  Then 
the  exchange  values  of  A,  B,  and  C  will  be  derived  solely 
from  the  "  marginal  "  utility  of  these  products,  but  their 
exchange  values  are  peculiar  in  this,  that  they  will  be  re- 
lated, will  be  adjusted,  each  to  the  others  by  reason  of  their 
common  origin  in  P.  If  a  unit  of  P  entering  into  A 
attains  in  that  form  a  higher  value  that  when  entering 
into  B  or  C,  then  more  A's  will  be  made  from  P  and  less 
B's  and  C's.  The  increase  in  the  supply  of  A's  will  de- 
crease their  value  by  decreasing  the  marginal  utility  of  A's.1 
This  process  keeps  the  values  of  A's,  B's,  and  C's  in  a 
mutual  adjustment.  If  we  carelessly  confine  our  view  to 
a  part  of  this  process  of  adjustment,  we  see  what  appears 
to  be  a  determination  of  the  value  of  A,  the  product,  by 
the  value  of  P,  the  production  good.  If  the  value  of  A 
is  out  of  adjustment  with  its  cost  in  P,  and  then  the  ad- 
justment is  effected,  it  is  the  value  of  A  which  seems  to 
move  to  that  of  P.  The  value  of  P  may  seem  to  be  the 
independently  determining  factor.  As  a  matter  of  fact, 
in  the  first  place,  the  value  of  A  moves  only  when  its 
marginal  utility  has  been  altered  by  a  change  of  its  supply, 
and  in  the  second  place,  when  it  does  move  toward  the 
value  of  P,  that  of  P  also  moves  toward  it.  It  depends 
or.  the  relative  importance  of  A's  in  comparison  with  all 
of  the  rest  of  the  products  of  P,  how  far  the  value  of  A 
moves  and  how  far  the  value  of  P  moves  in  their  mutual 
adjustment.  If  it  is  discovered  that  the  two  stars  in  a 

1  Or  at  any  rate,  if  not  by  decreasing  their  marginal  utility,  by  de- 
creasing their  marginal  price  equivalent.     See  the  section  just  preceding. 


LABOR  THEORY  OF  VALUE          [4I6 

"  double  star  "  are  approaching  each  other,  we  easily  con- 
ceive that  both  take  part  in  the  moving.  But  when  an 
apple  falls  to  the  earth  it  is  more  difficult  to  realize  that  the 
earth  also  falls  toward  the  apple,  moving  its  due  proportion 
of  the  distance  between  them.  In  the  same  way,  when 
we  see  that  the  value  of  some  relatively  unimportant  product 
remains  equal  to  its  cost  of  production,  we  are  inclined  to 
state  the  case  as  one  of  pure  determination  of  value  by 
cost.  But  this  "  determination  "  is  but  a  part,  viewed  by 
itself,  of  a  larger  process  by  which  the  supplies,  and  con- 
sequently the  values,  of  cognate  products  are  being  ad- 
justed to  one  another.  The  whole  truth  is  that  the  value 
of  production  goods  is  determined  by  the  value  of  their 
products.  Because  of  the  existence  of  great  common  pro- 
duction goods  of  manifold  productive  uses,  we  have  the 
peculiar  reaction  of  the  value  of  production  goods  on  the 
value  of  products,  a  part  of  which  process  is  described  in 
the  law  of  entrepreneur's  cost. 

The  case  of  real  life  is  more  complex  than  the  one  con- 
sidered above  in  that  a  plurality  of  common  production 
goods  always  enters  into  a  product.  In  this  more  com- 
plex case  we  find  an  entirely  new  problem,  which  rejoices 
in  the  name  of  the  "  imputation  of  the  productive  contri- 
bution," but  the  explanation  of  the  law  of  entrepreneur's 
cost  remains  exactly  the  same  in  principle  as  that  given  for 
the  artificially  simplified  case.  When  a  product  is  made 
from  several  production  goods,  as  a  carriage  from  wood, 
iron,  leather  and  labor,  the  value  which  by  anticipation  the 
production  goods  derive  from  the  product  is  divided  among 
them.  The  share  of  value  of  each  production  good  is 
called  its  productive  contribution.  The  different  solutions 
of  the  problem  of  imputing  the  productive  contribution 
already  offered  in  the  literature  of  value  and  distribution, 


417]  RELATION  OF  COST  TO  VALUE 

will  not  be  discussed  here.1  One  principle,  however,  will 
be  taken  for  granted.  It  will  be  assumed  that  the  pro- 
ductive contribution  of  any  kind  of  production  good  in  the 
value  of  a  particular  kind  of  product  varies  inversely  with 
the  supply  of  this  production  good  which  is  turned  to  the 
making  of  that  kind  of  product.  If  product  A  is  made 
from  production  goods  P,  Q  and  R,  and  the  amount  of 
P  used  in  producing  A's  is  increased — with  or  without  an 
increase  in  the  amount  of  Q's  and  R's  used  2 — the  produc- 
tive contribution  of  a  unit  of  P  in  the  value  of  A's  will 
be  decreased. 

Considering  now  the  reaction  of  the  value  of  production 
goods  on  the  value  of  particular  products,  we  may  repre- 
sent the  more  complex  case,  corresponding  to  real  life, 
by  supposing  products  A,  B  and  C  to  be  made  from  pro- 
duction goods  P  and  Q,  P  and  R,  and  P  and  S  respect- 
ively. In  this  case  the  products  are  cognate  only  by  reason 
of  their  relationship  through  P.  The  production  goods 
Q,  R  and  S  are  not  common.  Here  as  before  the  supplies 
and  values  of  the  products  A,  B  and  C  are  in  a  relation 
of  mutual  dependence.  The  dependence  is,  however,  not 
so  close  as  in  the  first  artificially  simplified  case  considered 
above.  In  the  present  case  it  is  not  the  values  of  A,  B 
and  C  themselves  which  are  brought  to  an  equilibrium,  but 
it  is  merely  the  productive  contributions  of  P  in  the  values 
of  A,  B  and  C  that  must  reach  an  equality.  If  a  unit  of 
P  obtains  a  higher  productive  contribution  in  A  than  in 

1  Explanation  of  the  principles  in  accordance  with  which  the  various 
classes  of  production  goods  share  in  the  value  of  the  product  is  but 
a  part  of  the  theory  of  distribution  viewed  in  a  particular  way. 

2  The  use  of  some  kinds  of  production  goods  cannot  be  increased 
without  increasing  to  the  same  extent  the  use  of  certain  other  kinds 
in    the    same    production,    but    it    can    be    shown    that   this    does    not 
change  the  general  principle  of  the  case. 


160          LABOR  THEORY  OF  VALUE 

B  and  C,  more  P  will  be  put  to  the  making  of  A's  and 
less  to  the  making  of  B's  and  Cs,  until  a  unit  of  P  attains 
the  same  productive  contribution  in  each  of  these  products. 
If  the  amount  of  P  put  to  the  making  of  A's  is  increased, 
the  supply  of  A's  will  be  increased  and  A's  will  decline  in 
value.  But  the  decline  in  the  value  of  A's  caused  in  this 
manner  will  fall  entirely  upon  the  productive  contribution 
of  P.  The  decline  of  value  takes  place  merely  to  bring 
the  contribution  of  P's  in  A's  to  an  equilibrium  with  the 
contribution  of  P's  in  B  and  C.  Abstract  as  the  fore- 
going formulae  are,  they  are  nevertheless  real.  If  entre- 
preneurs were  not  able  to  ascertain,  at  least  approximately, 
the  productive  contributions  of  the  various  production 
goods  entering  into  the  product  which  they  manufacture, 
they  would  be  unable  to  tell  either  how  much  of  each 
productive  factor  they  can  afford  to  buy  or  what  price 
they  can  pay  for  it. 

When  we  call  to  mind  the  fact  that  in  actual  industry 
most  production  goods  are  themselves  products,  and  that 
into  the  majority  of  final  products  nearly  all  the  great 
common  production  goods  enter,  we  realize  the  stupendous 
complexity  of  the  relationships  of  cognate  products  in 
actual  life.  It  is  no  wonder  that  ordinarily  a  whole  half 
of  the  process  by  which  the  values  of  all  these  fellow 
products  are  brought  to  mutual  adjustment  escapes  our 
notice.  Pig  iron  derives  its  value  from  a  thousand  and 
one  kinds  of  products.  When  the  value  of  one  of  these 
alone  is  being  brought  into  adjustment  with  the  value  of 
pig  iron,  the  mass  is  all  on  the  side  of  the  pig  iron,  if  we 
may  so  express  it.  In  this  movement  the  single  product 
is  seeking  a  value-equilibrium  with  all  the  vast  multitude 
of  other  products  of  pig-iron.  It  seems  itself  to  effect  all 
the  adjusting.  As  a  matter  of  fact,  it  contributes  its  due 


419]  RELATION  OF  COST  TO  VALUE 

share  to  the  determination  of  the  value  of  the  raw  iron. 
Thus  far,  we  may  safely  affirm,  the  difficulty  which,  at 
first  sight,  the  law  of  entrepreneur's  cost  seems  to  present 
to  the  utility  theory  has  been  quite  surmounted. 

It  is  a  matter  of  some  interest  to  define  as  exactly  as 
possible  the  relation  of  potentiality  cost  to  entrepreneur's 
cost.  When  an  entrepreneur,  in  making  his  product,  uses 
a  production  good  capable  of  other  applications,  by  other 
entrepreneurs,  his  product  is  made  at  the  expense  of  poten- 
tiality cost.  Whether  in  the  isolated  or  in  the  social  econ- 
omy, there  is  waste  whenever  a  good  is  produced  at  a 
potentiality  cost  which  is  higher  than  the  value  of  the 
good  itself.  A  greater  value  will  be  sacrificed  to  obtain 
a  less.  In  the  isolated  economy  Crusoe  will  easily  guard' 
himself  against  this  form  of  waste.  In  the  social  economy, 
the  competition  of  entrepreneurs  for  the  supplies  of  produc- 
tion goods  prevents  the  same  form  of  waste.  Competition 
being  granted,  nowhere  will  there  be  found  an  entrepreneur 
who  uses  up  production  goods  to  make  a  value  less  than 
the  highest  value  that  these  goods  could  produce  elsewhere. 
For  otherwise  the  entrepreneurs  located  at  the  other  points 
of  higher  return  would  be  able  to  command  the  production 
good  for  their  purposes,  and  the  possibility  of  profits  would 
furnish  them  with  the  motive  to  bid  for  it.  If  entrepre- 
neurs' costs  always  consisted  solely  in  the  value  of  pro- 
duction goods  capable  of  manifold  applications,  we  could 
say  that  the  potentiality  cost  of  a  product  determined  its 
entrepreneur's  cost.  For  the  former  cost  consists  in  the 
highest  other  values  that  these  production  goods  may  be 
made  to  produce  elsewhere,  and  the  entrepreneur  will  nor- 
mally have  to  pay  that  value  for  them  and  no  more.  His 
necessary  outlay  for  a  product  is  thus  regulated  by  its 
potentiality  cost. 


LABOR  THEORY  OF  VALUE 


[420 


But  sometimes  in  the  making  of  a  product  certain  valu- 
able production  goods  may  be  used  whose  employment  does 
not  involve  potentiality  cost.  These  are,  of  course,  pro- 
duction goods  capable  of  being  used  in  this  one  product 
alone.  A  production  good  may  be  capable  of  making  but 
one  kind  of  product  and  yet  receive  from  that  product  a 
certain  share  of  value  as  its  productive  contribution.  A 
mineral  spring  may  be  so  situated  as  to  be  such  a  pro- 
duction good.  A  mine  is  a  perfect  example.  Here  a  new 
question  confronts  us.  Does  or  does  not  an  entrepreneur's 
outlay  in  the  value  of  such  a  production  good  constitute 
a  part  of  entrepreneur's  cost?  This  is  solely  a  question 
as  to  how  we  choose  to  define  entrepreneur's  cost.  It  may 
be  defined  either  way.  But  in  the  event  that  we  define 
this  cost  to  include  outlays  for  single-use  production  goods, 
it  will  no  longer  be  possible  to  assert  that  potentiality  cost 
governs  entrepreneur's  cost  wholly  and  in  all  cases.  Let 
us  give  an  illustration  of  the  question.  If  the  bottled  water 
of  a  mineral  spring  can  sell  for  ten  cents  in  a  neighboring 
city,  and  it  costs  five  cents  for  the  bottle  and  labor  and 
two  cents  for  transportation,  is  or  is  not  the  three  cents 
per  bottle  which  remains  as  the  rent  ("price-determined 
surplus  ")  to  the  spring  a  part  of  the  entrepreneur's  cost 
of  producing  bottled  mineral  water?  If  the  vender  of  the 
water  did  not  own  the  spring,  he  would  be  inclined  to 
reckon  the  rent  paid  for  it  to  its  owner  as  a  part  of  his 
money  costs.  But  economists  are  agreed  that  the  distinc- 
tion between  costs  and  surpluses  does  not  hinge  on  rela- 
tions of  legal  ownership.  If  the  producer  of  the  bottled 
water  owned  the  spring,  he  would  merely  pay  the  rent  of 
it  to  himself.  To  the  present  writer  it  seems  that  entre- 
preneur's cost  may  be  defined  either  to  be  coextensive  with 
potentiality  cost,  or  to  exceed  this  cost  by  the  inclusion  of 


42 1 ]        RELATION  OF  COST  TO  VALUE 

"  price-determined  "  rents,1  provided  a  consistent  usage  be 
maintained.  In  the  one  case,  entrepreneur's  cost  is  deter- 
mined by  potentiality  cost;  in  the  other  case  it  is  principally 
determined  by  potentiality  cost.2 

1  When  a  single-use  production  good  is  short-lived  instead  of  dur- 
able, so  that  it  receives  its  value  from  its  product  in  one  payment,  in- 
stead of  a  series  of  payments  in  time,  we  do  not  call  its  value  return 
a   "  rent."     Its   value  is  nevertheless   "  price-determined "   in   the   same 
sense  as  the  rents  just  discussed  and  belongs  to  the  same  category  as 
these  rents. 

The  term  "  price-determined  rent "  has,  among  professed  followers 
of  Ricardo  (such  as  Professor  Marshall  who  holds  to  Ricardo's  theory 
in  the  main),  come  to  mean  the  income  to  a  durable  single-use  pro- 
duction good.  In  the  most  unfortunate  terminology  of  the  Ricardian 
school — which  the  writer  believes  can  be  traced  back  to  their  ulti- 
mately false  philosophy  of  value — a  "  price-determined  rent "  is  one 
which  "  does  not  enter  into  price."  But  the  leading  exponents  of 
present-day  Ricardian  doctrine  are  now  agreed,  it  seems,  that  when  a 
production  good  is  capable  of  more  than  one  application — as  land  to 
wheat  or  fruit  or  pasture — its  rent  does  enter  into  the  price  of  its 
product.  Therefore  they  mean  by  a  price-determined  rent,  not  the 
rent  of  such  a  good,  but  the  rent  of  a  single-use  production  good. 

2  A  plausible  argument  could  be  made  to  show  that  we  have  Ricardo's 
authority    for    maintaining    that    price-determined    rents    must    not    be 
considered  a  part  of  entrepreneur's  cost.     For  Ricardo  said  "  rent  can- 
not enter  in  the  least  degree  into  price."     But  there  can  be  no  ques- 
tion that  by  this  he  meant  that  rent  cannot  enter  into   cost  of  pro- 
duction.    As  was  frequent  with  him,  he  did  not  say  precisely  what  he 
meant.     Malthus  had  said  that  cost  of  production  includes  wages,  "  pro- 
fits," and  rent,  and  that  profits  and  rent,  not  being  paid  for  labor,  pre- 
vented the  regulation  of  value  by  pure  labor  cost.     Ricardo  admitted 
that  profits  enter  into  cost  but  minimized  the  difficulty  thus  granted  in 
the  labor  theory.     On  the  contrary  he  denied  that  rent  enters  into  cost. 
The  first  paragraph  of  his  chapter  on  rent  shows  it  to  be  his  purpose  in 
that  chapter  to  justify  this  denial.     Later  he  stated  his  contention  as 
being  that  rent  cannot  enter  into  "  price,"  instead  of  cost. 

Now  Ricardo  frequently  thought  of  cost  as  being  composed  of 
"  labour  and  profits"  !  In  most  places  we  can  make  his  reasonings 
clear  only  by  substituting  for  this  hybrid  concept  a  plain  concept  of 
entrepreneur's  cost  If  Ricardo  habitually  meant  entrepreneur's  cost 
by  the  words  "  cost  of  production,"  then  his  famous  doctrine  comes  to 


164  LABOR  THEORY  OF  VALUE          [422 

In  accounting  for  the  value  of  consumption  goods  the 
Austrian  theory  takes  their  supply  for  granted.  In  the 
same  way,  when  the  Austrians  come  to  their  explanation 
of  the  law  of  cost  they  take  the  supplies  of  production 
goods  for  granted.  If  the  supply  of  pig  iron  brought 
every  year  to  the  iron  market  be  increased,  the  supply  of 
the  products  of  iron  will  be  increased  and  the  exchange 
values  of  these  products  will  fall.  The  exchange  value  of 
pig  iron  will  fall  in  consequence.1  At  this  point  a  ques- 
tion— a  criticism  in  behalf  of  the  cost  theories  of  value — • 
naturally  suggests  itself.  Is  not  supply  ultimately  regu- 
lated by  cost  of  production  in  some  form,  and  is  not  cost 
of  production  thus  either  the  ultimate  regulator  of  value 
itself,  or  at  least  a  joint  regulator  with  utility?  We  have 
suggested  here  the  famous  question  of  the  "  reconciliation  " 
of  the  cost  and  the  utility  theories  of  value.  It  is  certain 
that  the  only  form  of  cost  which  can  exercise  ultimate 
control  over  the  supply  of  any  produced  good  is  what  we 
have  called  by  the  generic  name  of  "  pain  cost."  The 
potentiality  cost  of  a  product  is  measured  in  the  value  of 
the  production  goods  entering  it.  But  this  value  itself 
depends  on  the  supply  of  these  production  goods.  The 
ultimate  cost  regulator  of  the  value  of  both  the  products 
and  the  production  goods  cannot  be  potentiality  cost.  The 
influence  of  potentiality  cost  causes  the  supply  of  the  in- 

signify  that  price-determined  rents  are  not  properly  a  part  of  en- 
trepreneur's costs.  As  far  as  the  present  writer  can  see,  our  decision 
in  this  regard  is  purely  a  matter  of  arbitrary  choice  between  two  possi- 
ble definitions  of  entrepreneur's  cost.  As  far  as  Ricardo  is  concerned, 
he  had  no  clear  and  definite  concept  or  concepts  of  cost.  Into  poten- 
tiality cost,  a  price-determined  rent  assuredly  does  not  enter. 

1  The  value  of  the  iron  may  fall  earlier  in  time  than  the  value  of  its 
products,  because  entrepreneurs  using  it  know  beforehand  that  the 
increased  products  of  pig  will  have  to  be  sold  lower. 


423]        RELATION  OF  COST  TO  VALUE         ^5 

dividual  kind  of  product  merely  to  be  adjusted  to  the 
supplies  of  its  cognate  products.  But  potentiality  cost  has 
no  influence  whatever  over  the  total  supply  of  the  produc- 
tion goods  or  the  absolute  supply  of  the  total  mass  of 
cognate  products.  To  appeal  to  a  simple  illustration,  if  a 
flow  or  stream  of  some  production  good  be  supposed  to 
divide  into  several  branches  as  it  proceeds,  each  branch 
representing  one  of  the  several  cognate  products  of  that 
good,  the  influence  of  potentiality  cost  may  determine  the 
relative  volumes  of  the  different  product-streams,  but  only 
pain  cost — if  any  cost  at  all — can  influence  the  volume  of 
the  parent  stream,  and  thus  govern  the  absolute  volume  of 
all  the  branches.  Entrepreneur's  cost  also,  most  obviously, 
fails  as  an  ultimate  regulator  of  supply.  This  cost  is  but 
the  proximate  agency  through  which  the  two  elementary 
forms  of  cost  exert  their  influences  upon  the  relative  and 
absolute  supplies  of  products.  Undoubtedly  the  recog- 
nition that  pain  cost  is  the  only  form  of  cost  capable  of 
exerting  any  ultimate  control  of  value,  helps  to  suggest 
that  it  be  called  "  real  cost "  or  "  true  cost."  Professor 
Marshall,  for  instance,  analyzes  cost  into  two  forms,  (i) 
real,  and  (2)  money  costs. 

6.  There  is  to-day  a  large  following  for  the  doctrine 
that  cost  and  utility  are  joint  and  equal  regulators  of  value. 
Professor  Alfred  Marshall,  for  instance,  states  that  "  we 
might  as  reasonably  dispute  whether  it  is  the  upper  or  the 
under  blade  of  a  pair  of  scissors  that  cuts  a  piece  of  paper, 
as  whether  value  is  governed  by  utility  or  cost  of  produc- 
tion." *  Historically,  there  have  been  developed  by  econ- 
omists two  distinct  and  apparently  antagonistic  theories 
professing  to  afford  ultimate  explanations  of  value;  the 
earlier  or  cost  and  the  later  or  utility  theory.  But  if  it 

1  Principles  of  Economics,  4th  ed.,  1898,  p.  428. 


1 66          LABOR  THEORY  OF  VALUE 

can  be  shown  that  in  reality  cost  and  utility  are  but  joint 
regulators  of  value,  recent  thinkers  hold  this  equivalent  to 
a  demonstration  that  the  two  apparently  hostile  doctrines 
are  after  all  but  the  two  parts  of  a  larger  harmonious 
whole.  It  is,  therefore,  maintained  by  many  that  the  two 
opposed  schools  of  value  merely  failed  to  take  a  broad 
enough  view  of  the  problem.  Thus  we  have  ever  before 
us  the  interesting  question  of  the  reconciliation  of  the 
cost  and  utility  theories.  If  it  be  desired  to  effect  a  fun- 
damental reconciliation,  what  appears  to  be  the  most  pro- 
pitious starting  point  is  found  in  the  theory  of  the  "  mar- 
ginal or  final  equivalence  of  utility  and  disutility,"  a  doc- 
trine which  originates  purely  as  a  theory  of  "  subjective" 
or  esteem  value  in  contrast  with  exchange  value.  The 
first  writer  to  give  this  theory  a  definite  formulation  was 
probably  Gossen,  but  it  was  J.  B.  Clark's  later  but  entirely 
independent  statement  of  the  same  idea  which  was  first  to 
bring  it  to  the  notice  of  economists  generally.1 

Professor  Clark  develops  a  theory  that  the  ultimate 
standard  of  the  value  of  a  good  is  the  "  effective  social  dis- 
utility "  cost  of  its  acquisition.  Thus  he  presents  a  theory 
of  distinctively  social  valuation.2  But  we  also  find  as  a 
part  of  his  doctrines  a  theory  of  purely  individual  valua- 
tions. Professor  Clark  distinguishes  clearly  between  these 
two,  and  in  fact  develops  the  theory  of  social  from  the 
theory  of  individual  valuation.  In  drawing  the  reader's 
attention  to  these  doctrines,  it  will  suit  our  purposes  best 

1  Professor  Clark's  theory  appeared  first  in  the  New  Englander  for 
1881.     Gossen's   statement   of  the   same   fundamental   idea   was   much 
earlier,  but  the  strange  fate  of  his  work  is  known  to  all.     Professor 
Clark's  theory  of  value  was  developed  by  him  independently  of  Gossen 
and  of  Menger  and  Jevons  as  well. 

2  See  the  Distribution  of  Wealth,  chap.  xxiv. 


425]  RELATION  OF  COST  TO  VALUE  ^7 

to  emphasize  as  much  as  possible  the  distinction  between 
value  in  the  individual  economy  and  in  the  social  economy. 
We  may,  therefore,  adopt  the  device  of  "  Crusoe  eco- 
nomics," and  consider  the  relation  of  subjective  cost  to 
value  in  the  isolated  individual  economy.  In  the  theory 
of  value,  the  pursuit  of  this  plan  does  not  involve  a  waste 
of  time,  but  on  the  contrary  it  is  an  excellent  measure  for 
which  there  is  precedent  at  some  point  or  other  in  the 
writing-s  of  nearly  all  theorists.  The  plan  corresponds  to 
the  artifice  of  the  primitive  society  of  hunters  and  fishers 
so  frequently  used  and  also  abused  by  the  classical  econo- 
mists. It  is  in  a  peculiar  degree  a  device  of  what  Roscher 
called  the  "  idealistic  method."  We  are,  of  course,  now 
dealing  with  a  problem  entirely  outside  the  possible  sphere 
of  the  "  historical  method."  We  find  in  the  Crusoe  econ- 
omy the  prototype,  as  it  were,  of  many  a  complex  value 
relation  in  advanced  social  conditions,  and  an  appreciation 
of  certain  simple  and  highly  generalized  principles  true  of 
this  economy  may  greatly  facilitate  our  understanding  of 
the  difficult  subject  of  cost  and  value  under  real  conditions. 
But  the  strongest  reason  of  all  for  considering  consciously 
and  explicitly  the  case  of  Crusoe  by  himself,  is  because 
there  are  many  examples  in  the  literature  of  value  where 
certain  doctrines  are  laid  down  ostensibly  as  universal  prin- 
ciples, which  are  in  reality  conditioned  upon  the  uncon- 
scious assumption  of  Crusoe  conditions.  The  case  of 
Crusoe  should  be  discussed  if  only  to  show  what  principles 
are  limited  to  the  conditions  of  his  economy. 

Crusoe  might  possess  various  articles  of  value  which  cost 
him  no  labor,  or  cost  him  an  entirely  negligible  amount, 
such  as  certain  scarce  fruits;  but  the  major  part  of  Crusoe's 
wealth,  let  us  suppose,  is  produced,  and  is  freely  repro- 
ducible, by  his  labor.  The  amount  of  labor  power  which 
he  expends  upon  his  island  is  variable  at  his  pleasure  within 


1 68          LABOR  THEORY  OF  VALUE          [426 

wide  limits.  If  he  choose  to  work  only  a  few  hours  a 
day  through  the  year,  he  will  produce  only  a  certain  limited 
amount  of  the  most  useful  things.  If  he  add  more  hours 
per  day,  he  will  produce  more  of  the  old  kinds  of  goods 
and  also  other  different  articles,  luxuries  as  contrasted  with 
necessities,  but  at  any  rate  things  of  lower  utility.  Thus 
as  Crusoe  increases  the  hours  of  labor  power  put  forth 
per  day,  he  finds  that  there  is  a  decline  in  the  additional 
utility  produced  by  each  successive  increment  of  labor.  On 
the  other  hand,  he  finds  that  the  pain  cost  or  disutility 
of  labor  increases  as  he  toils  longer  and  longer.  Crusoe 
will,  for  his  average  day,  work  until  the  increasing  disutility 
of  labor  comes  to  an  equality  in  his  judgment  with  the 
decreasing  utility  of  the  things  being  produced.  It  would 
not  be  rational  for  him  to  stop  at  an  earlier  point,  for  then 
further  labor  would  produce  him  a  means  of  satisfaction 
greater  than  the  "  pain  "  of  the  labor  itself.  Nor  would 
he  labor  beyond  this  point  so  that  the  pain  would  exceed 
the  pleasure  gain.  Thus  the  utility  produced  by,  and  the 
disutility  of,  the  final  increment  of  labor  in  the  working- 
day  counterbalance,  or  we  have  the  "  marginal  equivalence 
of  utility  and  disutility." 

.  The  most  important  part  of  Professor  Clark's  teaching 
is  that  the  disutility  of  labor  expended  in  producing  goods 
is  the  ultimate  standard  of  their  value.  To  establish  this 
thesis,  it  is  necessary  for  him  to  show  that  the  "  effective  " 
disutility  of  an  increment  of  labor  is  always  the  actual  dis- 
utility of  the  final  increment,  and  that  the  "  effective " 
utility  produced  by  any  increment  is  the  actual  utility  pro- 
duced by  the  final  increment.  If  Crusoe  works  ten  hours 
a  day,  any  hour  of  the  day's  labor  will  have  the  same 
effective  disutility  as  the  tenth  hour.  Thus  if  it  costs  one 
hour  of  labor  to  produce  the  article  A,  the  pain  cost  of 
A  is  always  in  effect  the  disutility  of  the  final  or  tenth 


427]  RELATION  OF  COST  TO  VALUE  ^9 

hour  of  labor,  no  matter  in  what  part  of  the  day  the  good 
A  happens  actually  to  be  produced.  For  if  Crusoe  should 
decide  to  go  without  this  article  in  order  to  avoid  the  hour 
of  labor  which  it  costs,  his  day  would  then  consist  of  nine 
hours  spent  upon  the  rest  of  his  products,  and  the  effect 
would  be  to  save  himself  the  disutility  of  the  tenth  or  last 
hour.1  By  shortening  the  working-day  an  hour  he  can- 
not do  otherwise  than  save  himself  from  suffering  this 
marginal  disutility. 

In  a  similar  way  it  can  be  shown  that  the  effective  utility 
of  a  product  A  produced  by  the  first  hour  of  labor  is  the 
same  as  the  actual  utility  of  the  product  B  produced  by 
the  tenth  hour.  For  if  A  were  to  be  lost,  destroyed,  or 
traded  away,  another  A  could  be  produced  in  its  stead 
through  the  sacrifice  of  a  B,  by  turning  the  tenth  hour 
from  B  to  the  production  of  an  A.  In  effect,  then,  upon 
the  possession  of  A  is  dependent  merely  the  utility  of  B. 
The  utility  of  a  good  is  defined  as  its  power  to  afford  satis- 
faction, but  the  "  effective  utility  "  of  a  good  as  conceived 
by  Professor  Clark  is,  we  may  say,  the  power  of  that  good 
over  a  man's  satisfactions,  taking  into  consideration  the  ad- 
justments he  may  make  in  his  productive  activities  in  case 
of  the  loss  of  that  good.  If  he  produces  this  same  good 
over  again,  and  instead  goes  without  some  other  good,  in 
effect  he  foregoes  the  utility  of  the  latter,  and  this  is  pre- 
cisely the  effective  utility  of  the  first  good.2  Thus,  in 

1  So  large  an  increment  as  an  hour  is  taken  merely  as  a  matter  of 
convenience.     There    is    a   certain    form    of   attack   upon    all    marginal 
methods  of  theorizing  in  economics  which  is  always  met  by  making  the 
increments  infinitesimal.     It  is  hardly  necessary  to  guard  against  that 
attack  here. 

2  The  curious  reader  would  find  it  of  interest  to  compare  Professor 
Smart's   statement  that  the  value  of  a  good  is  almost  always  in   the 
end  measured  by  a  "  foreign  utility."     "  The  value  of  a  horse  may  b« 


1 70          LABOR  THEORY  OF  VALUE          [428 

Professor  Clark's  view,  the  utility  produced  by  the  last 
increment  of  a  man's  labor  affords  a  unit  for  measuring 
the  effective  utility  to  him  of  any  and  all  the  freely  pro- 
ducible products  of  his  labor.  But  it  has  already  been 
shown  that  the  disutility  of  this  last  increment  of  labor  is 
equal  to  the  utility  produced  by  it.  Thus  terminal  dis- 
utility becomes  also  an  available  unit  of  "  subjective  "  or 
esteem  value,  and  Professor  Clark  adopts  this  as  the  "  ulti- 
mate standard  of  value"  upon  the  ground  that  pain  is  a 
more  convenient  measure  than  pleasure.1  The  theory  sig- 
nifies that  the  subjective  value  to  the  isolated  producer  of 
any  good  whose  supply  depends  on  labor  can  be  most  con- 
veniently measured  by  the  labor  cost  of  that  good.  To 
quote : 

It  follows  that,  in  the  case  of  an  isolated  man,  we  may  measure 
the  subjective  value  of  goods  by  the  mere  duration  of  the  work 
that  creates  them.  All  goods  made  in  an  hour  are  equal  in 
effective  utility  and  all  hours  of  labor  are  of  equal  effective 
disutility.  Destroy  the  product  of  an  hour's  work,  and  you  in- 
jure the  man  by  a  fixed  amount;  make  any  hour's  work  un- 
necessary, by  making  nature  freely  supply  what  is  produced 
in  that  period,  and  you  benefit  the  man  by  a  fixed  amount  .  .  . 
The  product  of  two  hours'  work  will  always  be  of  just  twice  as 
much  subjective  value  as  is  the  product  of  one.2 

Professor  Clark  has  in  some  place  defined  subjective  value 
as  the  "  measure  of  effective  utility."     Menger  defined  this 

measured  by  the  foreign  utility  of  a  summer  vacation."  See  Introduc- 
tion to  the  Theory  of  Value,  pp.  37-8.  Much  dialectical  exercise  of 
interest  could  be  had  by  comparing  fully  the  precise  formulae  of  "mar- 
ginal "  utility  developed  by  the  Austrian  economists  and  Prof.  Clark's 
formula.  Clark's  theory  is  at  bottom  in  harmony  with  the  Austrian, 
but  goes  further. 

1  See  op.  cit.,  p.  380.  z  Ibid.  p.  389. 


429]  RELATION  OF  COST  TO  VALUE 

kind  of  value  as  the  significance  attained  by  a  good  in  our 
estimation  when  we  know  that  some  satisfaction  of  ours  is 
conditioned  upon  command  of  this  particular  good.  Value, 
as  an  amount,  is  the  measure  of  the  quantity  of  satisfaction 
conditioned.  The  present  writer  has  already  expressed  his 
opinion  1  that  Menger's  mere  definition  of  value  gives  the 
solution  to  the  great  riddle  of  the  relation  of  value  to  use- 
fulness and  satisfaction,  and  that  virtually  from  the  mere 
proposition  contained  in  this  definition  a  large  part  of  the 
theory  of  value  can  be  deduced  directly.  It  is  of  great 
interest  to  note,  therefore,  that  Professor  Clark's  definition 
of  subjective  value  is  in  entire  harmony  with  Menger's. 
The  definition  of  Menger  explains  value  universally,  wher- 
ever there  is  value.  Clark's  definition,  though  conceived 
quite  independently  by  him,  is  but  an  extension  of  the 
principle  in  Menger's  definition,  but  an  application  of  it  to 
a  certain  special  case.  This  case,  though  logically  a  special 
instance,  is  however  typical  of  most  of  the  goods  we 
imagine  a  Crusoe  to  be  producing,  consuming  and  repro- 
ducing. This  is  the  case  of  freely  reproducible  goods. 
Here,  if  a  good  be  destroyed,  its  value  will  be  revealed  by 
the  satisfaction  that  must  be  given  up  because  of  its  de- 
struction, which  is  the  satisfaction  finally  conditioned  upon 
it.  In  the  end,  what  Professor  Clark  points  out  is  merely 
that  this  good  may  be  replaced  by  diverting  to  its  making 
labor  which  otherwise  would  have  been  employed  in  pro- 
ducing some  other  good  which  Crusoe  chooses  to  resign 
instead.  The  satisfaction  in  effect,  or  in  the  end,  condi- 
tioned by  good  A  is  the  satisfaction  directly  conditioned  by 
or  afforded  by  good  B,  the  good  given  up.2 

1  Cf.  ante  p.  145. 

2  A  brief  comparison  of  the  Austrian  concept  of  "  marginal  utility  " 
with  Clark's  concept  of  "effective  utility"  may  be  of  interest.     Many 


172  LABOR  THEORY  OF  VALUE  [430 

As  it  appears  to  the  present  writer,  Clark's  theory  of 
esteem  value  is  to  this  point  so  well  founded  that  even  the 
most  uncompromising-  opponent  of  labor  theories  can  find 
no  ground  to  deny  it.  We  have  here  explained  a  labor 
measure  of  esteem  value,  perfectly  justified  at  least  under 
the  conditions  of  the  isolated  economy,  and  Professor 
Clark's  analysis  has  disclosed  the  inner  reasons  why  this 
measure  can  be  employed.  Indeed,  while  speaking  of  re- 
producible goods  in  the  Crusoe  economy,  it  may  be  affirmed 
that  cost  is  not  only  a  "  measure  "  of  esteem  value,  but  is 
also  a  joint  regulator  of  value.  To  be  precise,  the  costli- 
ness of  a  good  acts  jointly  with  the  utility  of  the  good  in 
regulating  its  value.  To  say  that  one  thing  regulates  an- 
other is,  of  course,  asserting  more  than  that  it  measures 

kinds  of  goods  are  divisible  into  parts  without  changing  their  economic 
nature.  Grain  is  a  good  example.  A  piano  is  an  example  of  the 
other  kind  of  good,  the  unit  good.  When  a  given  good  is  divisible 
into  increments,  the  Austrians  point  out  that  the  value  of  any  or  every 
increment  depends  purely  upon  the  satisfaction  afforded  by  the  last 
used  or  least  useful  increment.  Putting  it  in  another  way,  they  say  the 
marginal  utility  of  the  good  is  the  actual  utility  of  the  last  increment, 
and  value  depends  on  marginal  utility.  The  very  essence  of  this  prin- 
ciple is  that  the  value  of  a  thing,  as  for  instance  first  increment,  does 
not  depend  on  its  own  exact  utility.  Professor  Clark,  developing  his 
thought  in  his  own  way,  and  using  a  different  terminology,  goes  further 
than  the  Austrians,  but  along  the  same  line.  The  "  effective  "  utility  of 
a  good  is  not  its  own  utility,  but  is  that  other  least  utility  produced 
by  the  same  amount  of  labor.  The  Austrians  state  that  the  value 
of  any  bushel  of  wheat  depends  on  the  utility  of  the  "  last "  bushel, 
because  if  any  bushel  is  removed  the  result  will  be  that  the  last  bushel 
is  really  given  up,  or  any  bushel  is  in  effect  the  last.  Clark  points  out 
that  among  goods  which  are  all  freely  reproducible,  the  value  of  the 
product  of  any  unit  of  labor  time  depends  on  the  utility  of  the  least 
useful  product  produced  by  a  unit  of  labor  time,  though  this  other  least 
useful  product  be  an  entirely  different  kind  of  good  and  not  an  in- 
crement of  the  same  kind  of  good.  Many  minute  questions  in  this 
connection  we  may  pass  for  lack  of  space. 


43 1  ]  RELATION  OF  COST  TO  VALUE 

that  other.     A  regulator  is  a  measuring  cause,  whereas  a 
mere  measure  is  not  a  cause  of  the  thing  estimated.1 

In  what  precise  sense  is  costliness  here  a  co-determinant 
of  value?  When  a  good  both  costs  pain  or  discomfort  in 
its  production  and  affords  pleasure  in  its  use,  it  is  common 
custom  to  speak  of  the  "  cost  "  of  the  good  as  the  exact 
opposite  of  its  "  utility."  But  these  concepts  are  not  direct 
opposites.  Cost  consists  in  the  subjective  experiences  of 

1  Without  attempting  a  systematic  classification  of  kinds  of  causes, 
we  all  know  that  such  is  our  notion  of  cause  that  we  can  conceive  of 
many  causes  which  bear  no  assignable  quantitative  relation  with  their 
effects  (*.  e.,  effects  for  which  they  are  partly  responsible).  The 
pressure  of  an  electric  button  "  caused  "  the  Hell  Gate  explosion  (after 
conditions — *'.  e.,  other  causes — were  prepared)  but  the  amount  of 
pressure  put  upon  this  button,  or  the  size  of  this  button,  had  nothing 
to  do  with  the  quantity  of  the  explosion  or  the  amount  of  work  done 
in  the  explosion.  We  are  permitted  to  speak  of  the  act  of  pressing 
the  button  as  a  cause,  but  not  as  a  regulator  (except  with  respect  to  the 
time  of  the  explosion,  an  irrelevant  consideration  here),  for  a  regu- 
lator is  a  cause  the  quantity  of  which  determines  the  quantity  of  the 
effect.  It  should  be  noted  that  when  the  quantity  of  the  cause  is  com- 
pared with  the  quantity  of  the  effect,  to  show  that  the  former  regu- 
lates the  latter,  the  quantity  of  the  cause  must  be  established  inde- 
pendently of  the  quantity  of  this  same  effect;  otherwise  the  fallacy 
of  reasoning  in  a  circle  is  committed.  This  digression  does  not  lead 
us  so  far  astray  from  the  theory  of  value  as  might  be  supposed.  This 
precise  fallacy  has  been  committed  time  and  again  in  the  reasonings 
that  have  been  brought  to  the  support  of  the  labor  theory  of  value. 
For  instance  when  the  term  "  labor "  is  used  to  signify  disutility  or 
cost  (instead  of  productive  power)  by  the  expounders  of  the  "diffi- 
culty of  attainment "  philosophy  of  value,  and  it  is  asserted  that  the 
labor  cost  of  a  good  regulates  its  value,  the  objection  is  soon  en- 
countered that  skilled  labor  produces  a  greater  value  per  day  than  com- 
mon. Thereupon  it  is  frequently  explained  that  skilled  labor  is  con- 
densed, or  counts  as  more  labor  per  day  than  common.  As  a  matter 
of  fact,  we  all  know  that  in  the  vast  majority  of  cases,  skilled  labor, 
measured  independently  of  the  value  produced  by  it,  and  measured  as  a 
quantity  of  labor  in  the  sense  of  disutility,  is  less  labor  per  day  than 
common  toil. 


174          LABOR  THEORY  OF  VALUE          [432 

the  producing  man,  and  its  precise  opposite  is  pleasure  or, 
specifically  in  our  economic  usage,  satisfaction  of  want. 
But  "  utility  "  never  is  a  precise  equivalent  for  satisfaction. 
On  the  contrary,  utility  is  another  kind  of  opposite  of 
satisfaction,  being  always  conceived  to  belong  to  the  good 
and  not  to  lie  within  the  man,  except  in  the  treatises  of  cer- 
tain unconscious  metaphysicians.  In  virtue  of  a  certain 
combination  of  physical  properties  a  good  possesses  a  power 
to  produce  a  satisfaction  in  a  man.1  This  power,  due  to 
its  physical  properties,  is  the  best  conception  of  the  good's 
utility.  The  precise  opposite  of  utility  cannot  be  desig- 
nated by  cost,  but  the  word  "  costliness "  fits  the  need. 
In  virtue  of  their  physical  properties,  or  physical  and 
chemical  relations  with  other  external  things,  some  goods 
require  a  large  amount  of  change  of  man's  external  sur- 
roundings to  be  effected  by  him  in  order  that  they  may 
be  produced.  We  give  these  goods  the  attribute  of  costli- 
ness, similar  to  the  attribute  of  utility,  and  the  relation 


1  Whenever,  of  course,  the  man  acting  for  himself,  places  himself  in 
the  relation  with  the  good  which  permits  its  power  to  become  effective. 
Compare  the  discussion  in  section  ii  of  this  chapter.  No  apology  is  of- 
fered for  the  present  "  discussion  of  mere  words  "  as  it  might  be  termed 
by  the  hostile.  These  discussions  contribute  to  clearness  of  thought 
upon  questions  of  theory,  and  clearness  of  thought  in  theory  is  certain 
from  time  to  time  to  be  of  benefit  to  discussions  of  many  proximate 
and  practical  issues.  For  instance,  we  find  recently  a  well  known  writer 
explaining  that  "  scientifically "  the  distribution  of  money  among  na- 
tions is  so  governed  that  money  reaches  the  level  of  equal  "  mar- 
ginal utility "  in  the  different  countries.  See  a  paper  entitled  "  The 
Distribution  of  Money,"  Journal  of  Political  Economy,  vol.  ix,  p.  49. 
This  proposition  has  no  meaning,  and  is  authorized  by  nothing  in  the 
Austrian  theory,  though  the  writer  quotes  the  Austrians  freely.  A 
little  "  word  discussion  "  by  "  practical "  writers  might  enable  them  to 
see  when  they  are  covering  up  the  absence  of  an  explanation  by  mere 
conjuring  with  formulae  whose  real  meaning  has  not  been  ascertained. 


433]  RELATION  OF  COST  TO  VALVE 

between  costliness  and  cost  is  similar  to  the  relation  be- 
tween utility  and  satisfaction.1 

The  question  which  now  concerns  us  is  whether  in  the 
case  of  freely  producible  goods  the  supply  of  which  can 
be  augmented  at  will  by  the  application  of  more  labor, 
the  costliness  of  a  good  takes  an  equal  part  with  its  utility 
in  determining  its  value.  If  the  marginal  utility  of  a 
good  determines  its  value,  marginal  utility  is  still  the  mere 
creature  of  the  supply  of  the  good.  The  larger  the  supply, 
the  lower  the  marginal  utility.  Putting  the  matter  the 
way  it  is  often  stated  in  present-day  treatises,  the  supply 
that  will  be  produced  depends  upon  the  cost  of  the  good, 
and  thus  at  bottom  cost  determines  value.  Making  a  more 
careful  statement  we  may  say  that  the  supply  depends  upon 
both  the  costliness  and  the  utility,  since  Crusoe  will  in- 
crease the  supply — the  average  yearly  supply,  we  should  say 
if  speaking  of  a  crop — until  the  marginal  cost  and  mar- 
ginal satisfaction  become  equivalent.  For  the  normal  case, 
the  increase  of  the  number  of  increments  of  the  good  will 
entail  an  increase  of  marginal  cost  and  a  decrease  of  mar- 
ginal utility.  Both  the  marginal  cost  and  the  marginal 
utility  vary  when  the  supply  is  changed,  but  the  supply 
tends  to  rest  at  the  point  of  equilibrium  of  these  two  quan- 
tities, and  is  thus  determined  by  them  jointly.2  If  the 

1  The  term  "  disutility "  is  almost  universally  used  as  equivalent  to 
"discomfort,"    that    is,    as    being    purely    subjective.    This    makes    it 
available  as  an  opposite  of  satisfaction   (or  of  utility  according  to  the 
usage  of  those  writers  who  use  the  latter  as  a  subjective  term)  but  the 
same  usage  debars   its  employment  as  the  opposite  of  utility  in  the 
sense  advocated  in  the  present  essay. 

2  The  determination  of  Crusoe's  supply  of  a  good  at  this  point,  which 
fixes  the  subjective  value  of  the  good,  bears  a  few  obvious  analogies 
to   the   determination    of    competitive    exchange   values    in    the   social 
market  at  the  point  of  "  normal  equilibrium  of  supply  and  demand," 
as  described  by  Professor  Marshall. 


176  LABOR  THEORY  OF  VALUE  [434 

general  costliness  of  this  grain  should  fall,  its  value  would 
soon  be  lowered,  for  Crusoe  would  be  led  to  produce  more 
of  it  in  order  to  reach  the  point  of  supply  which  equili- 
brates final  cost  and  satisfaction.  Thus  the  marginal  util- 
ity and  value  would  be  lowered.  Conversely  if  the  costli- 
ness be  increased,  value  will  be  raised.  Under  Crusoe 
conditions  we  are  considering  the  relations  of  costliness, 
utility  and  value  in  the  simplest  of  circumstances  we  can 
imagine.  Even  here  the  question  arises,  is  it  correct  to 
affirm  that  costliness  is  precisely  coordinate  with  utility  in 
determining  value?  To  me  it  seems  apparent  that  utility 
exercises  a  more  direct  and  intimate  control  over  value 
than  cost,  even  in  the  simplified  case  now  before  us.1  In 
the  first  place,  value  is  still  derived  solely  from  utility.2 
Cost  influences  value  only  by  way  of  influencing  the  value- 
determining  utility  itself.  Thus  cost  is  more  remote  from 
value  than  is  satisfaction  or  utility.  Even  in  the  case  of 
goods  valued  according  to  their  "  effective  utility,"  that  is, 
according  to  a  foreign  utility,  there  is  no  violation  of  the 
principle  that  value  is  derived  solely  from  utility.  Cost  or 
costliness  is  never  the  source  of  value.  No  amount  of 
cost  endured  for  a  good  without  utility  will  confer  value 
upon  it.  There  can  be  no  discrepancy  between  utility  (here 
we  are  speaking  of  the  utility  that  is  the  counterpart  of  the 
satisfaction  conditioned  upon  the  good,  i.  e.,  the  marginal 
utility  in  the  cases  of  goods  divisible  into  increments)  and 
value,  whereas  there  may  be  between  costliness  and  value. 
If  anything  prevents  the  supply  of  a  good  from  being 

1  Reasons  will  appear  later,  it  is  'believed,  to  show  that  when  we 
reach  the  complex  case  of  real  social  industry  and  exchange  value 
the  control  of  cost  over  value  will  be  much  more  impaired  than 
that  of  utility. 

8  It  has  already  been  shown  why  it  is  quite  impossible  to  hold  to 
the  opinion  that  cost  is  the  essence  of  value.  Cf.  ante  pp.  34-5. 


435]  RELATION  OF  COST  TO  VALUE 

increased  to  the  point  of  marginal  equivalence  of  utility 
and  costliness,  then  of  course  the  value  follows  the  utility 
and  not  the  costliness.  Costliness  is  thus  not  a  more  fun- 
damental cause  of  value,  but  merely  a  more  remote  cause 
than  utility,  and  in  any  event  can  influence  value  only  by 
affecting  the  utility  itself,  by  helping  to  determine  supply. 
7.  Turning  to  social  conditions,  we  meet  the  new  prob- 
lem of  exchange  value.  It  is  true,  certain  value  compari- 
sons may  be  made  in  the  entirely  isolated  economy  which 
afford  a  kind  of  prototype  of  the  exchange  value  of  the 
market.  Crusoe  might,  perhaps,  have  occasion  to  make 
mental  note  that  ten  bushels  of  his  wheat  supply  possess  the 
same  esteem  value  to  him  as  one  cord  of  his  firewood.  This 
comparison  involves  a  ratio  between  valuable  goods,  and  if 
Crusoe  only  had  reason  to  trade  with  himself  we  might 
find  the  phenomenon  of  purchasing  power — the  true  con- 
ception of  exchange  value — and  ten  bushels  of  wheat  would 
have  the  purchasing  power  of  one  cord  of  wood.  This 
kind  of  exchange  value — if  we  dare  call  it  such — would  be 
most  simple;  for  it  would  be  directly  determined  by,  and 
be  in  exact  proportion  to,  esteem  value.  Just  as  Crusoe 
will  be  able  to  carry  the  esteem  values  of  reproducible 
goods  in  mind  most  readily  in  terms  of  disutility  cost,  so 
would  he  be  able  to  strike  value  ratios  between  such  goods 
most  easily  by  comparing  the  disutility  costs  of  their 
physical  units  of  measure.  Thus,  if  one  cord  of  wood 
should  exchange  for  ten  bushels  of  wheat,  the  reason  would 
be  that  a  bushel  of  wheat  costs  one-tenth  as  much  labor 
as  one  cord  of  wood.  This  thought  need  not  be  pursued 
further.  If  the  exchange  value  of  a  good  in  the  social 
market  depended  in  the  same  direct  manner  upon  the  esteem 
value  of  that  good  to  all  society  or  to  "  society  as  a  unit," 
the  final  theory  of  exchange  value  would  be  much  simpli- 
fied. But,  unless  the  present  writer  is  mistaken,  a  good 


178          LABOR  THEORY  OF  VALUE          [436 

cannot  possess  an  esteem  value  to  society  as  a  whole,  but 
can  merely  have  a  separate  value  to  each  individual  mem- 
ber of  society. 

Though  it  is  questionable  whether  we  can  apply  the 
theory  of  final  equivalence  of  utility  and  disutility  directly 
and  in  an  unmodified  form  to  all  kinds  of  social  value,  we 
still  find  generally  that  each  individual  in  society  values 
his  personal  consumption  goods  substantially  in  the  same 
manner  as  Crusoe.  Under  the  division  of  labor,  the  indi- 
vidual does  not  produce  his  own  consumption  goods,  but 
renders  certain  productive  services  to  society  for  which  he 
receives  remuneration  in  the  shape  of  a  money  income. 
Money  income  may  also  be  derived  from  capital  acquired 
at  the  cost  of  abstinence  on  the  part  of  the  individual  re- 
ceiving it.  But  again,  it  may  as  well  be  the  result  of  gift 
or  inheritance,  in  which  case  it  represents  no  subjective 
cost  to  the  recipient.  When  a  dollar  costs  a  man  subjective 
sacrifice  to  acquire  it,  and  the  dollar  is  spent  for  a  com- 
modity, this  commodity  thus  indirectly  costs  that  sacrifice. 
The  commodity  is  bought  by  the  consumer  because  it  pos- 
sesses esteem  value.  It  derives  this  esteem  value  from  the 
satisfaction  conditioned  by  it,  but  this  value  may  well  be 
•carried  in  mind  by  the  consumer  in  terms  of  his  own  sub- 
jective cost.  Crusoe  spends  units  of  disutility,  as  it  were, 
to  obtain  from  nature  certain  utilities;  the  man  under  social 
conditions  spends  dollars,  which  may  represent  disutility, 
to  obtain  utilities  from  the  social  warehouse.  Professor 
Clark's  theory  of  "  effective  disutility  "  as  the  measure  of 
value  may  be  applied  to  the  individual  economy  within 
society  as  well  as  to  the  individual  economy  in  isolation. 

Everywhere  in  society  among  individuals  who  earn  a 
part  or  all  of  their  money  incomes,1  we  may  expect  to  find 

1  A  man  may  receive  part  of  his  income  by  gift  or  inheritance  and 


437]  RELATION  OF  COST  TO  VALUE 

pure  "  esteem  values  "  being  measured  by  subjective  costs. 
But  the  relation  of  subjective  cost  to  exchange  value  is  a 
different  matter.  Two  parlor  tables  of  the  same  make  and 
pattern  will  possess  the  same  exchange  values,  but  the 
esteem  values  of  the  two  to  their  separate  owners  are  not 
comparable  quantities.  Each. of  these  owners,  for  himself, 
may  estimate  the  esteem  value  of  the  table  in  terms  of  its 
indirect  cost  of  acquisition  in  his  own  disutility.  The  dol- 
lars cost  him  disutility  and  the  table  cost  him  dollars.  But 
this  is  not  at  all  the  same  as  saying  that  the  "  exchange 
value  "  of  a  table  is  measured  by  the  disutility  cost  of  pro- 
duction of  that  commodity.  Exchange  value  can  have  no 
such  intimate  relation  with  disutility  cost  as  esteem  value. 
Furthermore,  the  cost  of  production  of  tables  is  experi- 
enced only  by  makers  of  tables,  and  not  by  their  consumers. 
The  exchange  values  and  pain  costs  of  commodities  can 
have  no  closer  relation  than  one  of  mere  proportionality. 
It  is  possible  that,  if  one  A  has  an  exchange  value  of  two 
B,  an  A  has  cost  twice  as  much  disutility  to  produce  as 
a  B.  In  this  case  the  exchange  values  of  these  commod- 
ities, each  in  terms  of  the  other,  are  proportional  to  their 
subjective  costs.  It  is  permissible  to  predicate  equality  of 
subjective  cost  and  esteem  value,  but  to  say  that  the  sub- 
jective cost  of  an  article  equals  its  exchange  value  would, 
of  course,  convey  no  meaning.  The  unqualified  classical 
labor  theory  asserted  that  exchange  values  were  determined 
in  proportion  to  relative  labor  costs.  The  aim  of  this  chap- 
earn  a  part.  The  latter  part  becomes  in  this  case  a  sort  of  marginal 
portion.  Though  all  of  his  dollars  have  not  cost  him  disutility,  some 
of  them  have,  and  upon  principles  already  discussed,  any  dollar  has 
the  "  effective "  disutility  cost  of  the  most  costly  dollars.  This  is 
just  as  true  as  the  fact  that  the  first  hours  of  labor  may  sometimes  be 
play  and  yet  their  product  always  counts  as  having  a  disutility  cost 
because  of  the  disutility  of  the  final  hour. 


l8o          LABOR  THEORY  OF  VALUE          [438 

ter  has  been,  therefore,  to  prepare  to  answer  this  question : 
Are  the  exchange  values  of  commodities  in  the  social  mar- 
ket in  proportion  to  the  subjective  costs  of  production  of 
these  commodities?  Is  there  any  way  of  defining,  or 
method  of  reckoning,  the  pain  cost  of  a  good,  which  will 
enable  us  to  show  this  proportionality? 

Before  attending  directly  to  these  questions,  it  is  best  to 
consider  whether  it  is  possible  to  compare  the  subjective 
costs  of  commodities  produced  by  different  persons  or 
groups  of  persons.  A  ton  of  coal  may  exchange  for  six 
bushels  of  wheat.  The  subjective  cost  of  the  coal  consists 
chiefly  in  the  labor  of  certain  miners;  that  of  the  wheat  in 
the  labor  of  certain  farmers.  To  assert  that  the  subjective 
costs  of  production  of  these  commodities  either  are  or  are 
not  in  proportion  to  their  respective  exchange  values,  im- 
plies that  we  are  able  to  compare  these  costs  as  quantities. 
To  assert  proportionality  requires  that  we  be  able  to  say 
that  the  disutility  experienced  by  the  miners  in  producing 
a  ton  of  coal  is  equal  to  that  experienced  by  the  farmers 
in  producing  six  bushels  of  wheat.  To  assert  dispropor- 
tionality,  we  must  be  able  to  state  that  these  disutilities  are 
unequal.  If  these  disutilities  are  quite  incommensurable, 
we  can  assert  nothing  regarding  the  relation  of  these  costs 
to  the  corresponding  exchange  values.1  Men  as  scholars 
are  accustomed  to  maintain  that  the  pleasures  or  pains  of 
different  minds  cannot  be  compared  as  quantities,  while  in 
every-day  life  the  same  men  are  equally  accustomed  to  state 
that  John  enjoys  music  more  than  Paul,  or  that  Primus 
suffers  more  or  works  harder  than  Secundus.  May  or  may 

1  The  reader  should  bear  in  mind  that  the  "  theory  of  price,"  in 
which  exchange  value  is  explained  according  to  the  utility  theory  of 
value,  involves  so  comparison  whatever  of  the  satisfactions  of  differ- 
ent persons.  See  ante,  §  4. 


439]  RELATION  OF  COST  TO  VALUE  jgi 

not  we  affirm  that  the  stoker  works  harder,  or  in  our  own 
jargon,  suffers  more  disutility,  than  the  dining-room  stew- 
ard? In  the  hope  of  settling  part  of  the  issues  raised  in 
these  questions,  let  us  consider  the  meaning  of  one  of 
Adam  Smith's  statements  regarding  wages  in  different  em- 
ployments. I  refer  to  the  doctrine  that  wages  tend  to  be 
higher  than  the  average  in  employments  where  there  is  a 
higher  degree  of  disutility.  This  tendency  is  operative 
only  under  perfect  competition,  and  the  existence  of  numer- 
ous non-competing  groups  occasions  a  result  much  changed 
from  that  to  be  expected  from  this  tendency,  which  is 
sometimes  described  in  the  "  evil  paradox  "  that  the  harder 
the  work,  the  lower  the  wages.  The  question  which  con- 
cerns us  here  is,  how  much  does  either  of  the  above  state- 
ments imply  with  respect  to  the  possibility  of  comparing 
the  pains  or  pleasures  of  different  persons.  It  seems  to  the 
writer  that  neither  necessitates  a  direct  quantitative  com- 
parison of  the  subjective  experiences  of  different  persons. 
I  may,  perhaps,  say  that  the  persons  in  occupation  A  are 
suffering  more  disutility  and  receiving  higher  wages  than 
those  in  employment  B,  but  all  I  can  be  supposed  really  to 
know  is  that  if  I  were  in  occupation  A,  I  would  suffer 
more  discomfort  than  if  I  were  in  occupation  B.  If  I  am 
a  person  of  "average"  (i.  e.,  typical)  constitution,  I  may 
infer  legitimately  that  this  is  true  also  of  any  average  per- 
son. While  making  no  affirmation  that  John  suffers  more 
disutility  than  Paul,  either  when  these  persons  are  in  the 
same  or  in  different  employments;  1  we  may  be  able  to  state 
that  either  John  or  Paul  will  suffer  more  in  occupation  A 
than  in  B.  The  upshot  of  the  matter  is  that  Adam  Smith's 
proposition  implies  only  our  ability  to  compare  the  dis- 

1  This  kind  of  affirmation  is,  however,  very  common,  and  hence  the 
presumption  is  that  it  has  a  legitimate  meaning. 


182  LABOR  THEORY  OF  VALUE  [44O 

utility  (using  this  word  in  the  sense  it  ought  to  have)  of 
different  tasks.  A  task  is  objective,  consisting  in  certain 
objective  results  to  be  effected  under  certain  objective  con- 
ditions. When  the  objective  characteristics  of  a  task  neces- 
sitate subjective  discomfort  in  the  person  who  performs  it, 
the  task  or  employment  possesses  disutility,  which  is  thus 
a  concept  the  opposite  of  utility.  If  within  a  competing 
group  employment  A  affords  a  higher  wage  than  employ- 
ment B,  because  its  disutility  is  higher,  the  result  is  brought 
about  not,  in  the  first  instance,  through  the  perception  by 
the  workers  that  certain  individual  persons  work  harder 
than  other  individual  persons,  but  through  the  perception 
that  any  normal  individual  for  himself  would  work  harder 
at  the  task  A  than  at  the  task  B.  The  possibility  of  com- 
parison is  implied  merely  between  the  "  pains  "  of  the  same 
person,  though  there  are  common  forms  of  expression  which 
imply  more.  We  may  conclude,  then,  that  there  is  a  per- 
fectly legitimate  sense  in  which  we  can  compare  the  sub- 
jective costliness  of  commodities  produced  in  society  by 
entirely  different  groups  of  persons.  And  no  one  doubts 
that  the  day's  product  of  a  coal  miner  has  a  higher  dis- 
utility cost  than  the  day's  product  of  a  farmer. 

When  we  find  the  statement  in  an  economic  treatise  that 
the  exchange  values  of  commodities  are  ultimately  regu- 
lated by  their  subjective  cost,  it  is  to  be  assumed  that  the 
meaning  is  the  same  as  that  which  would  be  expressed 
with  greater  precision  by  using  the  word  costliness.  With 
the  explanations  already  offered  we  may  henceforth  follow 
common  usage  and  employ  the  mere  word  cost.  There  are 
two  distinct  ways  of  reckoning  the  pain  cost  of  a  com- 
modity, namely,  (i)  as  total  cost;  (2)  as  marginal  cost. 
Ricardo  reckoned  cost  according  to  a  hybrid  method.  The 
total  subjective  cost  of  a  good  consists  in  all  the  discom- 
forts of  labor  and  abstinence  actually  endured  in  the  past 


441  ]  RELATION  OF  COST  TO  VALUE 

to  produce  it.  Taking  the  factor  of  labor  alone  for  illus- 
tration, it  includes  the  cost  of  the  labor  directly  applied 
to  the  good,  and  of  the  labor  indirectly  applied  by  being 
directly  applied  to  the  raw  material  and  machinery  which 
are  used  up  in  its  making.  The  machinery,  however,  has 
always  been  made  at  the  combined  expense  of  labor  and 
of  using  up  formerly  existing  tools  and  machinery;  and  the 
latter  tools  and  machines  had  a  labor  cost.  A  product's 
total  cost  may  include,  perhaps,  one  one-hundredth  of  the 
labor  cost  of  the  first  generation  of  certain  machinery  used 
in  its  production,  and  as  we  go  back,  one  one-millionth  of 
the  second  generation;1  and -the  total  labor  cost  of  any 
commodity  thus  goes  back  no  man  knows  how  far.  There- 
fore, the  total  labor  cost  alone  of  a  good  (to  say  nothing 
of  the  abstinence  element)  is  an  extremely  indefinite  quan- 
tity; and  it  is  impossible  to  know  anything  very  definite 
about  the  comparative  total  labor  costs  of  different  articles. 
But  beyond  this,  we  do  know  that  the  existence  of  differ- 
ential rents  destroys  the  possibility  of  proportionality  be- 
tween total  labor  costs  and  exchange  values. 

The  concept  of  the  marginal  cost  of  a  good  appears  in 
the  Ricardian  theory  of  rent,  and  has  been  involved  more 
or  less  clearly  in  the  reasonings  of  most  modern  econo- 
mists, but  it  is  almost  entirely  to  J.  B.  Clark  that  we  owe 
the  consistent  development  of  this  idea.  The  marginal 

1  Suppose  a  machine  is  destroyed  in  the  making  of  100  units  of  a 
certain  product.  Then  the  total  labor  cost  of  each  of  these  units 
contains  T^  of  the  total  labor  cost  of  this  machine.  This  is  ex- 
plained by  Ricardo  and  by  recent  followers  of  Ricardo,  as  for  instance 
by  Professor  Macvane  in  his  text  book.  Another  earlier  machine 
was  partly  used  up  in  making  this  first  one.  Perhaps  it  con- 
tributed y^^  of  its  total  labor  cost  to  this  first.  Then  each  of  our 
products  contains  in  its  total  labor  cost  ^  ^  of  y^^^  of  the  total 
labor  cost  of  the  machine  of  the  second  generation  back. 


1 84          LABOR  THEORY  OF  VALUE          [442 

subjective  cost  of  a  good  may  consist  either  of  labor  or 
of  abstinence,  but  not  of  both  combined.  In  this  essay  we 
will  arbitrarily  set  aside  the  problem  of  abstinence  cost 
The  marginal  labor  cost  of  a  good  is,  of  course,  deter- 
mined by  ascertaining  the  marginal  product  of  labor  in 
producing  this  good.  To  illustrate  in  the  simplest  manner 
possible,  we  will  follow  the  time-honored  procedure  of 
eliminating  capital  for  the  moment,  and  suppose  succes- 
sive doses  of  labor  to  be  applied  to  a  given  piece  of  land.1 
Let  the  labor  force  applied  stand  at  a  certain  amount,  and 
suppose  the  dose  to  consist  of  a  labor  day.  Then,  if  ex- 
perimentation reveals  the  fact  that  the  addition  of  one 
more  dose  will  increase  the  whole  product  by  the  amount 
of  two  bushels,  we  define  these  two  bushels  to  be  the 
marginal  product  of  a  labor  day.  Professor  Clark  fre- 
quently refers  to  this  same  quantum  as  the  specific  product 
of  labor.  The  land  in  this  case  may  have  consisted  of  a 
loo-acre  field  and  the  total  labor  applied  may  have  amounted 
to,  say,  300  labor  days.  The  total  produce  may  have  been 
3,000  bushels  of  grain.  By  hypothesis,  capital  being  elim- 
inated, the  total  labor  cost  of  these  3,000  bushels  is  300 
labor  days,  or  ten  bushels  cost  one  labor  day,  or  the  total 
cost  of  a  bushel  is  one-tenth  of  a  day.  On  the  other  hand, 
the  marginal  cost  of  a  bushel  is  one-half  of  a  labor  day, 
since  two  bushels  are  the  marginal  product  of  a  day.2 

1  Using  capital  here  in  the  sense  of  means  of  production  that  are 
themselves  products  of  labor.     We  will  go  so  far  in  our  illustration  as 
to  suppose  that  the  land  has  never  had   labor  expended  upon  it  to 
drain  it,  or  in  any  other  way  to  "  fix  an  element  of  capital  in  it." 

2  In  this  illustration  the  marginal  cost  is  five  times  as  high  as  the 
"total  cost"  or  total  average  cost  of  a  bushel,  but  this  ratio  could 
have  no  significance  even  if  the  data  of  our  illustration  were  approxi- 
mately true  with  respect  to  the  direct  labor  cost  of  wheat  on  good  land, 
for  we  have  eliminated   from   the   real   total   labor  cost  all  of   what 
Ricardo  called  the  "  indirect "  labor  cost,  by  eliminating  capital. 


443 ]  RELATION  OF  COST  TO  VALUE  ^5 

Ricardo,  who  so  explicitly  defined  total  labor  cost  as  con- 
sisting of  the  labor  both  directly  and  indirectly  applied  to 
a  commodity,  also  assumed  that  in  one  respect  value- 
determining  cost  is  marginal,  though  he  never  used  the 
word  "marginal."  It  was  for  this  reason  that  not  far 
back  we  described  his  method  of  defining  cost  as  hybrid. 
His  doctrine  that  rent  does  not  enter  into  cost  was  but  one 
way  of  stating  that  on  land,  it  is  only  marginal  cost  (as 
he  expressed  it,  the  cost  of  the  most  costly  portion  of  the 
supply)  which  determines  value.  In  real  life,  products 
are  the  result  of  combining  not  land  and  labor  alone,  but 
land,  labor  and  capital  (in  the  sense  excluding  land — our 
usage  at  present).  When  Ricardo  was  expounding  and 
illustrating  the  theory  of  rent  which  bears  his  name,  he 
was  forced  to  suppose  that  the  successive  doses  added  to 
land  were  composed  of  capital  and  labor  jointly,1  which 
left  his  marginal  quantum  the  product  of  both  of  these 
agents.  This  left  him  with  the  great  interest  difficulty 
with  which  he  occupied  himself  in  his  first  chapter.2  It 
remained  for  J.  B.  Clark  to  point  out  that  the  marginal 
product  of  labor  could  be  disentangled  from  the  product  of 
capital  as  well  as  from  that  of  land.3  Upon  this  possibility 
depends  the  important  productivity  theory  of  wages.  In 
order  to  explain  the  process  by  which  the  pure  marginal 
product  of  labor  is  found  by  the  entrepreneur,  Clark  adopts 
what  is  virtually  the  business  man's  conception  of  capital, 

1  Ricardo  frequently  supposed  his  doses  to  consist  of  sums  of  money 
expended  by  the  farmer,  or  to  consist  of  increments  of  money  capital. 
These  doses  of  mone},  however,  would  be  expended  for  capital  goods 
and  labor  power  conjointly. 

2  Traced  in  the  fifth  chapter  of  the  present  essay. 

3  That  is  to  say,  when  we  affirm  that  in  our  theory  we  can  disentangle 
the  specific  product  of  labor,  we  mean  that  entrepreneurs  in  practical 
effect  do  ascertain  the  marginal  product  of  labor  in  making  up  their 
labor   forces. 


186          LABOR  THEORY  OF  VALUE          [444 

as  distinguished  from  concrete  capital  goods.  The  latter 
alone  have  been  designated  capital  by  most  economists  in 
their  formal  and  explicit  definitions.  Professor  Clark  pre- 
fers to  call  the  two  concepts  simply  capital 1  and  capital 
goods.  Capital  is  a  "  sum  of  productive  wealth,  invested 
in  material  things  which  are  perpetually  shifting — which 
come  and  go  continually  —  although  the  fund  abides."  2 
These  material  things  are  the  capital  goods.  Capital  as 
an  amount  must  be  measured  by  its  exchange  value.  A 
capital  of  $100,000  may  be  prepared  to  employ  say  40  men. 
Should  it  be  rearranged  to  employ  20  men,  its  concrete 
make-up  would  have  to  be  altered.  A  less  number  of 
machines  and  tools  of  better  quality  would  have  to  com- 
pose it.  Now  as  the  concrete  tissue  of  a  given  capital 
perishes  or  matures  and  frees  its  value  for  reinvestment  in 
more  concrete  goods,  an  entrepreneur  has  it  open  to  him 
to  alter  the  concrete  constitution  of  his  capital.  In  this 
way,  in  the  course  of  time,  an  entrepreneur  may  be  able  to 
rearrange  his  capital  so  as  to  augment  or  decrease  the 
labor  force  employed  with  it.  In  many  cases  pretty  large 
changes  in  the  labor  supply  employed  with  a  given  capital 
could  be  made  with  little  or  no  alteration  of  its  technical 
concrete  make-up.  Somewhat  slowly  and  under  this  and 
that  frictional  difficulty,  the  experimentation  is  made  which 
reveals  the  marginal  product  of  labor.  The  process  which 
discloses  this  must  always  in  the  end  be  one  in  which  an 
increment  of  labor  is  added  to  or  removed  from  the  force 
working  with  a  given  capital  and  an  observation  made 
of  the  resulting  addition  to  or  subtraction  from  the  total 
product.  The  exposition  of  this  process  and  the  explana- 
tion why  competition  tends  to  make  the  wages  of  labor 
(of  whatever  grade)  equal  to  its  specific  or  marginal  prod- 

1  Sometimes  "pure  capital."          z  Distribution  of  Wealth,  p.   119. 


445 ]  RELATION  OF  COST  TO  VALUE 

uct,  is  probably  the  greatest  contribution  to  economics  con- 
tained in  Clark's  Distribution  to  Wealth,  and  occupies  a 
large  part  of  that  work. 

As  was  virtually  pointed  out  by  Malthus,1  the  presence 
of  rent  and  interest  charges  in  entrepreneur's  costs  is  an 
insuperable  obstacle  in  the  way  of  the  theory  that  a  com- 
modity's total  labor  cost  is  proportionate  to  its  exchange 
value.  If,  however,  an  attempt  is  made  to  correlate  mar- 
ginal labor  cost  and  exchange  value,  the  difficulties  of  rent 
and  interest  are  eliminated.  When  we  say  that  these  diffi- 
culties are  eliminated,  we  do  not  mean  that  they  are  arbi- 
trarily set  aside,  or  that  we  merely  run  away  from  them : 
but  the  marginal  labor  cost  of  a  commodity  is  not  affected 
by  the  payment  of  rent  and  interest.  For  instance,  if 
wheat  is  being  produced  at  the  same  time  on  land  of  the 
best  and  land  of  the  poorest  grade,  a  large  rent  will  be  paid 
out  of  the  total  wheat  product  on  the  former  soil,  and 
little  or  no  rent  may  be  paid  out  of  the  total  product  on 
the  latter,  and  yet  the  cultivation  will  be  carried  to  the 
point  which  makes  the  marginal  product  of  labor  and  the 
marginal  labor  cost  of  wheat  the  same  on  both  grades. 
The  same  observations  may  be  applied  to  rent  of  capital 
(or  interest,  as  we  call  it  when  it  is  calculated  as  a  per- 
centage of  the  value  of  the  rent-bearing  agent).2 

The  great  difficulty  in  the  way  of  the  theorem  that  the 
marginal  labor  costs  of  commodities  are  in  proportion  3 
to  their  exchange  values,  is  the  problem  of  skilled  labor. 
The  best  way  to  show  the  effect  of  skilled  labor  upon  com- 

1  See  ante,  chap,  vii,  §  §  4  and  5. 

2  Adopting  the  view   of  the  income  of  capital   taken  by   Professor 
Clark  and  advocated  with  so  much  force  by  Professor  F.  A.  Fetter. 

3  By  this  phrase  we  mean  always  in  relative  proportion,  so  that  the 
value  of  A  is  to  that  of  B,  ES  the  cost  of  A  is  to  that  of  B. 


188  LABOR  THEORY  OF  VALUE  [446 

parative  marginal  costs  is  first  to  eliminate  it  temporarily 
from  the  problem,  and  show  what  the  relation  of  marginal 
labor  cost  would  be  to  exchange  value,  if  there  were  only 
common  labor  throughout  society.  If  all  labor  were  of  a 
single  grade,  all  commodities  which  are  products  of  labor 
would  have  exchange  values  in  proportion  to  their  respec- 
tive marginal  disutility  costs.  This  would  be  true  whether 
the  products  are  consumption  goods  or  are  merely  pro- 
duction goods  which  are  used  in  making  further  products. 
Some  valuable  goods  are  not  products  of  labor.  Such  are 
bodies  of  ore  lying  in  their  natural  state,  standing  timber, 
etc.  These  production  goods  have  no  disutility  cost,  mar- 
ginal or  total,  and  consequently  their  exchange  values  have 
no  relation  to  cost.^  Their  supplies  are  determined  inde- 
pendently of  human  agency.  Ore  at  the  surface,  crushed 
or  smelted  ore,  are,  however,  products  of  labor,  and  so 
long  as  only  a  part  of  the  known  existing  ore  of  mines  is 
removed — a  part  remaining  untouched  because  of  too  high 
cost — the  supply  of  any  product  resulting  from  the  com- 
bination of  labor  and  native  ore-bodies,  will  depend  upon 
marginal  labor  cost.1 

The  homogeneous  labor  force  (which  we  have  assumed 
temporarily)  will  distribute  itself  among  all  the  various 
industries  in  society  in  proportions  determined  by  the  mar- 
ginal product  in  each  industry.  Capital  will  also  distribute 
itself  throughout  the  system  of  industries,  tending,  of 
course,  in  the  long  run,  to  appear  in  each  industry  in  such 
proportions  as  will,  apart  from  inequalities  of  risk,  produce 
everywhere  an  equality  of  its  returns.  Assuming  the  dis- 
tribution of  capital  to  have  reached  a  condition  of  equilib- 

1  Put  in  proximate  and  practical  language,  the  amount  of  ore  that 
can  be  taken  profitably  from  a  mine  depends  jointly  on  the  price  of 
the  ore  at  the  surface  and  the  wages  of  labor. 


447]  RELATION  OF  COST  TO  VALUE 

rium — it  being  no  part  of  our  present  task  to  follow  out 
a  theory  of  interest — let  us  try  to  show  that  labor  will 
distribute  itself  over  the  field  of  industry  in  such  a  manner 
that  exchange  values  will  be  proportionate  to  marginal 
labor  costs.  If  labor  flows  from  one  industry  to  another, 
the  total  output  of  the  first  industry  will  decline  and  that 
of  the  second  will  increase.  The  change  in  the  supplies 
of  the  respective  products  of  these  industries  will  alter  the 
exchange  values  of  these  articles.  Different  distributions 
of  labor  among  industries  will  give  rise  to  different  rela- 
tive supplies  of  commodities  and  different  exchange  values. 
As  the  supply  of  labor  in  any  industry  increases,  its  mar- 
ginal product  decreases.  If  all  occupations  possessed  the 
same  disutility,  the  supply  of  labor  would  be  so  distributed 
that  its  marginal  product  would  have  the  same  exchange 
value  in  all  industries.  But  if  some  occupations  neces- 
sitate higher  disutility  costs  than  ordinary,  the  supply  of 
labor  obtainable  for  those  industries  will  decrease  until  the 
exchange  value  of  the  marginal  product  is  raised  till  it 
compensates  for  the  superior  disutility.1  If  one  commod- 
ity is  produced  at  a  higher  disutility  cost  (to  the  labor 
directly  employed  upon  it)  than  another,  the  marginal  prod- 
uct of  labor  in  it  will  have  a  higher  exchange  value.  If 
6  A  in  one  industry  and  i  B  in  another  make  the  mar- 
ginal product  of  a  labor-day,  6  A  will  exchange  for  I  B, 
provided  the  disutility  of  labor  is  the  same  in  both  em- 
ployments. But  if  it  costs  more  disutility  to  produce  6  A 

1  A  rise  of  the  exchange  value  of  the  specific  product  of  labor  com- 
pensates for  superior  disutility  by  enabling  the  laborer  to  purchase 
things  of  higher  esteem  value  with  his  enhanced  wages.  In  other 
words,  we  have  been  explaining  the  familiar  doctrine  that  wages  tend 
to  be  higher  in  employments  of  higher  cost.  If  a  laborer  were  free  to 
choose  the  precise  length  of  his  own  working  day,  he  would  stop  when 
the  final  disutility  of  the  labor  and  the  utility  of  the  commodities  pur- 
chased by  the  marginal  increment  of  wages  are  equivalent. 


190          LABOR  THEORY  OF  VALUE 

than  i  B,  the  relative  supplies  of  A's  and  B's  would  be 
so  adjusted  that  6  A  will  exchange  for  more  than  i  B. 
Thus  a  superior  disutility  cost  raises  the  exchange  value 
of  a  commodity,  in  order  that  this  commodity  may  afford 
a  superior  value  product  to  labor.  Labor-power  is  a  pecu- 
liar production  good.  Like  other  production  goods  of 
manifold  productive  uses,  its  expenditure  constitutes  poten- 
tiality cost;  but  it  is  unlike  others  in  that  human  pain  cost 
is  an  ever-present  incident  to  its  expenditure.  The  dis- 
tribution of  labor  power  among  different  productive  uses 
is  not  governed  solely  with  reference  to  its  share  of  value 
derived  from  the  product,  but  is  governed  in  part  with 
reference  to  the  pain-cost  involved  in  the  production  of 
the  product.  A  higher  disutility  necessitates  a  higher  share 
of  exchange  value.  Thus  it  comes  to  pass  that  this  most 
disposable  and  important  of  production  goods  will  dis- 
tribute itself  among  products  in  such  a  manner  that 
these  products  will  have  exchange  values  in  proportion  to 
their  marginal  pain  costs.  This  result  is  brought  about 
solely  by  control  of  the  relative  supplies  of  these  products, 
the  exchange  values  of  which  are  all  derived  from  utility 
solely  after  the  method  described  in  the  utility  theory. 

When  we  introduce  the  question  of  skill  into  the  prob- 
lem, we  find  that  the  supplies  of  many  kinds  of  labor  are 
limited  not  with  reference  to  the  disutility  of  the  tasks 
performed,  but  are  limited  solely  because  the  requisite  brain- 
power, ingenuity  or  strength  are  scarce.  The  marginal 
product  of  such  labor  is  raised  by  the  limitation  of  its 
supply.  Thus,  it  is  a  truism  that  many  occupations  of  the 
lowest  disutility  afford  very  high  wages,  and  that  in  the 
vast  majority  of  cases  high  wages  are  not  caused  by  high 
disutility,  but  by  scarcity  of  competent  persons.  Suppose 
the  commodity  A  is  scarce,  is  of  high  exchange  value,  and 
is  the  marginal  product  of  a  skilled  labor  day.  Article  B 


449]  RELATION  OF  COST  TO  VALUE  l^l 

is  the  product  of  a  day  of  the  lowest  kind  of  labor.  One 
A  may  well  exchange  for  three  or  four  B.  Yet  the  mar- 
ginal labor  cost  of  A  is,  in  the  typical  case,  even  less  than 
that  of  B,  for  the  skilled  laborer  ordinarily  suffers  less 
pain  cost  per  day  than  the  unskilled.  Hence,  the  ex- 
change values  of  these  products  are  quite  out  of  proportion 
to  their  comparative  marginal  disutility  costs.  The  existence 
of  non-competing  groups,  first  emphasized  and  named  such 
by  Cairnes,  is  then  a  fatal  obstacle  in  the  way  of  the  ad- 
justment of  exchange  values  to  comparative  marginal  costs. 
8.  We  may  now  essay  a  partial  summary  of  the  results 
which  have  been  reached  up  to  this  point.  The  end  of 
the  theory  of  value  is  primarily  to  explain  exchange  value. 
The  only  workable  definition  of  this  term  is  purchasing 
power.  The  purchasing  power  of  a  commodity  is  meas- 
ured objectively  in  terms  of  the  physical  units  of  some 
other  particular  good,  except  when  we  are  speaking  of  the 
concept  of  an  article's  general  purchasing  power.  This, 
its  purchasing  power  over  all  other  commodities,1  is  meas- 
ured as  some  kind  of  mean  or  average  of  all  its  particular 
purchasing  powers.  What  mean,  it  is  no  part  of  our  task 
to  enquire.  All  goods  which  possess  exchange  value  also 
possess  that  other  kind  of  worth  which  we  termed  "  esteem 
value."  Every  commodity  derives  its  exchange  value  solely 
from  its  esteem  value,  or,  speaking  with  precision,  from  its 
esteem  values.  For  a  commodity  has  a  separate  esteem 
value  to  each  individual  person  who  can  utilize  it.  If 
society  were  as  one  man,2  the  exchange  values  of  goods 

1  Or,  as  Walsh  states,   it  may  also  be  defined  as  the  article's  pur- 
chasing power  over  all  goods  including  itself.     This   is  not  the  same 
concept,  but  is  one  equally  entitled  to  the  name  "  general  purchasing 
power."     Op.   cit.,  p.    13. 

2  The  meaning  of  this  condition,  it  is  hoped,  will  be  apparent  from 
the  discussion  in  section  6. 


192          LABOR  THEORY  OF  VALUE 

would  be  but  the  exponents  of  their  relative  esteem  values. 
In  other  words,  if  a  physical  unit  of  one  commodity  ex- 
changed for  two  units  of  another,  the  reason  would  be 
merely  because  the  first  possessed  twice  as  much  esteem 
value  to  all  society  as  a  unit  of  the  second.  But  the  esteem 
value  of  an  article  is  a  much  more  definite  thing  than  a 
social  estimate,  i.  e.,  an  "average"  (or  typical)  estimate 
of  worth.  The  esteem  value  of  a  good  to  a  person  is  the 
measure  of  the  amount  of  that  person's  satisfaction  con- 
ditioned upon  the  enjoyment  of  the  good.  Goods  existing 
in  superfluous  abundance  give  satisfaction  but  do  not  con- 
dition it,  and  hence  lack  esteem  value.  Taking  for  granted 
the  amount  of  an  individual's  income,  the  esteem  value 
which  a  good  has  for  him  determines  his  price  equivalent 
for  that  good.1  The  market  price,  or  exchange  value,  of 
a  good  is  a  resultant  from  (never  in  any  sense  an  average 
of)  the  individual  price  equivalents  placed  upon  it  by  the 
body  of  individual  consumers. 

The  exchange  value  of  a  good  varies  inversely  with  the 
supply  of  it  presented  to  the  body  of  consumers.  The 
larger  the  supply,  the  lower  is  the  price  equivalent  which 
must  be  reached  as  the  marginal  determining  point  of  its 
market  price.2  A  change  of  supply  alters  exchange  value 
only  because  it  changes  the  marginal  price  equivalent.1  In 
the  social  market,  the  purchasing  powers  of  all  the  various 
products  over  one  another  depends  upon  their  relative  sup- 
plies. So  far  as  cost  of  production  in  any  form  exercises 
any  degree  of  control  over  the  value  of  a  good,  it  can  act 
solely  by  way  of  influencing  the  supply  of  the  good.  The 

1  See  p.   151.  2  See  p.   151. 

1  This  proposition  is  stated  loosely  as  being  that  an  increase  of 
supply  lowers  value  by  reducing  marginal  utility.  In  many  cases,  ex- 
change value  is  lowered  by  a  decline  of  marginal  utilities,  but  not 
always.  See  p.  152-4. 


45 1 ]        RELATION  OF  COST  TO  VALUE 

phenomenon  of  the  apparent  regulation  of  the  exchange 
values  of  products  by  their  entrepreneur's  costs,  is  but  :a 
part  of  a  large  process  in  which  cognate  (or  "fellow7') 
products  adjust  their  relative  supplies  and  their  exchange 
values  to  one  another,  to  the  end  that  the  common  pro- 
duction goods  entering  into  all  of  them  may  produce  equal 
productive  contributions  or  shares  of  exchange  value  per 
unit  in  all  of  their  productive  applications.1  The  relation 
of  the  pain  costs  of  products  to  their  exchange  values  is 
limited  to  one  of  mere  proportionality.2  The  pain  cost  of 
a  product  may  be  calculated  in  two  very  distinct  ways, 
giving  total  pain  cost  or  marginal  pain  cost.  The  total 
pain  cost  of  a  good,  consisting  in  all  the  labor  and  abstin- 
ence ever  endured  to  bring  it  into  existence,  is  quite  an 
indeterminate  quantity,3  and  its  influence  upon  the  ex- 
change value  of  a  good  is  very  remote  and  irregular.  The 
larger  part  of  total  labor  cost,  the  part  which  includes  the 
labor  directly  applied  to  commodities,  plus  the  labor  in- 
directly applied  by  being  directly  applied  to  the  raw  mate- 
rial and  machinery  immediately  used  in  their  production, 
and  so  on  for  the  few  nearest  generations  of  machines,  this 
being  the  part  which  excludes  the  infinitesimal  bits  of 
labor  cost  expended  far  in  the  past,  can  be  shown  positively 
not  to  be  in  proportion  to  their  exchange  values.  For  com- 
modities produced  at  a  higher  expense  of  rents  of  all  kinds 
(as  opposed  to  wages)  have  exchange  values  out  of  pro- 
portion to  this  calculable  part  of  their  total  costs.4  We 
find  that  the  control  of  marginal  cost  over  value  is  closer 
than  that  of  total  cost.  If  it  were  not  for  the  existence 
of  innumerable  grades  and  classes  of  skilled  labor,  the  sup- 

1  Compare  p.  160.  2  See  p.  179. 

8  Even    as    economic    quantities    go.     For    Concept    of    total    pain 
cost  see  p.  182. 
*  See  p.  183. 


194  LABOR  THEORY  OF  VALUE  [452 

plies  of  produced  goods  would  be  so  adjusted  that  their 
exchange  values  would  be  in  proportion  to  their  respective 
marginal  costs.  But  on  account  of  skill,  we  must  here 
again  characterize  the  influence  of  subjective  cost  as  re- 
mote and  irregular. 

:  In  conclusion,  it  is  true,  speaking  in  very  loose  and 
general  terms,  we  may  say  the  exchange  value  of  a  good 
depends  both  upon  its  utility  and  its  costliness  to  mankind. 
But  it  would  not  be  proper  to  say  that  cost  and  utility  are 
equal  and  coordinate  regulators  of  value.  Therefore,  Pro- 
fessor Marshall's  shears  simile  is  not  to  be  commended. 
The  most  noteworthy  changes  in  exchange  values  have 
been  produced  by  discoveries  which  reduced  the  labor  cost 
of  goods.  But  the  amount  of  the  reduction  thus  produced 
in  the  exchange  value  of  a  particular  commodity  could  have 
•only  the  roughest  correspondence  with  the  amount  by  which 
its  relative  pain  cost  was  reduced.  Also,  for  reasons  al- 
ready shown,  we  know  that  neither  before  or  after  these 
changes  was  it  possible  for  exchange  values  to  be  in  pro- 
portion to  relative  pain  costs,  whether  total  or  marginal 
costs  be  taken.  Furthermore,  all  alterations  of  exchange 
values  produced  by  cost  changes  are  effected  solely  by  alter- 
ation of  the  value-determining  utility  itself.  Utility  has  a 
much  more  direct  and  intimate  relation  with  value  in  either 
form  than  cost.  Value  may  exist  without  cost  and  cost 
may  be  expended  without  occasioning  value.  Value  never 
exists  without  utility  and  utility  (not  in  the  sense  of 
Smith's  "  use-value,"  but  the  effectual  utility,  the  utility 
which  measures  the  satisfaction  conditioned  by  a  good) 
never  exists  without  value.  Cost  affects  value  solely  by 
influencing  utility  itself.  From  this  comes  the  all-import- 
ant conclusion  that  whenever  any  of  the  numerous  and 
permanent  forces  are  active  which  interfere  with  the  in- 
fluence of  cost,  value  follows  the  utility  and  not  the  cost. 


INDEX  OF  AUTHORS  MENTIONED. 


BOhm-Bawerk,  62,  68,  95,  135,  147-9. 
Cairnes,  9,  14,  29,  Son,  9311,  in,  chap. 

x,  128,  134. 
Clark,  J.  B.,  37,  59,  108,  I2on,    13311, 

166-71,  178,  183-7. 
Davenport,  H.  J.,  136. 
Dietzel,  H.,  45,  136,  137,  13811,  153. 
Fetter,  F.  A.,  18711. 
Giddings,  F.  H.,  I2on. 
Gossen,  37,  128,  166. 
Green,  D.  S.,  136. 
Ingram,  J.  K.,  l8n. 
Jevons,  37,  98,  114,  128. 
Lauderdale,  89. 
Lloyd,  W.  F.,  128. 
Longfield,  Mountifort,  128. 
Macvane,  S.  M.,  I49n,  i83n. 
Malthus,  9,  1 1,  1 2,  14,  15,  21,  26,  37,  41, 

50,  52,  63,  74,  chap,  vii,  93n,  94, 

95, 102,  104-5,  II2>  I32>  139,  i63n- 
Marshall,  9,    14,  Son,  115,   I33n,   150, 

15 in,  r63n,  i65n,  I75n,  194. 
Marx,  36,  42,  47,  61,  64-70,  129,  I32n. 
McCulloch,  9,  n,  3in,  42,  chap,  vi,  93, 

95,  101. 

Menger,  20,  89,  128,  143,  145,  171. 
Mill,  James,  9,  n,  3in,  chap,  vi,  8^1,93. 


Mill,  J.  S.,  9,  14,  15,  56,  Son,  89,  chap, 
ix,  115,  116,  121,  133-4. 

Pantaleoni,  I4in. 

Ricardo,  9,  10,  n,  14,  15,  21,  26,27,  3'» 
35,  36,  chap,  v,  61,  62,  64,  68,  69, 
73.  74,  79, 80,  82-8,  89,  90, 9i,93n, 
94,  101,  102-3,  IO4~5»  IO6»  108, 
109,  no,  in,  112-13,  124-6,  129, 
130-2,  133,  137,  i63n,  182,  185. 

Roscher,  167. 

Say,  J.  B.,  14,  44,  46,  89,  93n,  94,  97, 
101,  129. 

Scrope,  95n. 

Seligman,  128. 

Senior,  9,  41,  chap,  viii,  104-5,  106, 
112-13,  114,  116,  123,  133. 

Smart,  Wm.,  152,  i69n. 

Smith,  9,  n,  13,  14,  15,  chaps,  ii-iv,  41, 

43,  44,  45,  5°,  56>  8°,  8l»  87»  88» 
89,  90,  91,  98,    128,  129-30,  137, 
I38n,  139,  181. 
Torrens,  9,  11,  32n,  chap,  vi,  89,  93,  95, 

I38- 

Walras,  128. 

Walsh,  C.  M.,  I4on,  141,  1910.  . 
Wieser,  12,  43,  I3in,  135,  I46n,  156. 


STUDIES  IN  HISTORY,  ECONOMICS  AND  PUBLIC  LAW 

EDITED    BY   THE    FACULTY   OF   POLITICAL   SCIENCE    OF 
COLUMBIA  UNIVERSITY 

Volume  XIX]  [Number  2 


HISTOKY  AND  CETTICISM 

OP   THE 

LABOR  THEORY  OF  VALUE 

IN  ENGLISH  POLITICAL  ECONOMY 


HY 

ALBERT  C.  WHITAKER,  Ph.D., 

Sometime  University  Fellow  in  Economics,  Columbia  University  ; 
Instructor  in  Economics,  Leland  Stanford  Junior  University 


Dork 
THE   COLUMBIA   UNIVERSITY   PRESS 

THE   MACMILLAN   COMPANY,   AGENTS 

LONDON  :  P.  S.  KING  &  SON 

1904 


Columbia  ianix>ersttv? 
FACULTY   OF   POLITICAL   SCIENCE 


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32627 


DATE  DUE 


PRINTED  IN  U.S.A. 


mSSSSSSS^St  Ub""y  Faciw 


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